Getting Hitched

For years, Mark Balasa had chatted over occasional breakfasts, sharing war stories and advice, with Armand Dinverno, a fellow advisor and neighbor. Then, one day, the thought occurred to him: What if they merged their suburban Chicago practices? They'd always seemed to share similar outlooks about investments and client service. And by joining together, they'd gain the kind of critical mass they might

For years, Mark Balasa had chatted over occasional breakfasts, sharing war stories and advice, with Armand Dinverno, a fellow advisor and neighbor. Then, one day, the thought occurred to him: What if they merged their suburban Chicago practices? They'd always seemed to share similar outlooks about investments and client service. And by joining together, they'd gain the kind of critical mass they might never achieve individually.

Despite their long acquaintance and like-minded attitudes, it took another two years of conversation for the two men to tie the knot. After all, not only did both have partners of their own, but there were myriad details to consider: everything from where to locate the new firm to how big the staff should be. “For a small-business owner, this is one of the biggest decisions you can make,” says Balasa. “We had to be cautious.”

Ultimately, it paid off. At $1.2 billion in assets under management, the combined practice, called Balasa Dinverno & Foltz, is about three times larger than it was when the two firms merged and, according to Balasa, it operates considerably more efficiently than his old practice did.

Mergers are not for everyone. They can be risky business. The reason is simple: You're not just merging two financial entities, you're joining together two cultures and business approaches. And, for many highly independent-minded advisors, that's not an appealing prospect. “When you merge, you have to suck up your ego,” says Robby Harft, an advisor with Raymond James Financial Services in Ashland, Ore., who has bought three firms in the past three years. “We're all mavericks. We all want to be the boss.”

Still, the merger may be the best way for a small advisory practice to achieve growth: It's much faster than trying to grow your business from within, and it's less costly than acquiring another practice outright. In fact, there are some signs that mergers are on an upswing — especially for RIAs. The reason: With the age of the typical RIA principal at around 51, according to a study by Pershing Advisor Solutions and Moss Adams, an increasing number of RIA principals are starting to plan for retirement. And some are choosing to merge their practices with more junior partners who can buy them out when it's time to quit. In 2005, for example, there were 45 mergers of RIA firms with over $100 million in assets under management — that's triple the number of RIA mergers that took place in 2002, according to David DeVoe, director of mergers & acquisitions for the strategic client group at Schwab Institutional.

Making It Work

Indeed, successful mergers can be well worth the risk. For one thing, a bigger practice can help attract bigger clients. “Everyone's chasing the high-net-worth individual,” says Frank Maiorano, managing director of Nuveen Investments' Institutional Services Group in Chicago. “But a family with $25 million to invest may not feel comfortable with a small manager.” Getting that client, he figures, requires at least $250 million in assets under management. You may also be able to create a more all-inclusive service by combining different specialties under one roof — a key element to achieving substantial growth, according to Philip Palaveev, senior consultant with Moss Adams. Merging with another practice also means more financial resources for expansion.

What are the keys to doing a merger right? For starters, you have to determine your purpose for merging — do you want to increase your client base or enter a new geographic region? And then you have to be sure that any target firm would help you achieve that goal. For example, financial advisor Don Hannahs, whose practice is affiliated with Lincoln Advisors, has merged with two other Lincoln-affiliated practices over the past seven years. First, he merged with a junior advisor, who had the kinds of organization skills he felt he was lacking. In the second merger, completed five years ago, he brought in two partners with a well-established practice, which helped him slash rent and marketing costs and other expenses, among other things.

Finding strong potential partners takes some digging and a lot of patience. To get started, you might want to contact the Financial Planning Association, Investment Management Consultants Association and other groups to see whether you can get listings on their Web sites and attend their conferences. But you should also get the word out to friends and colleagues. In fact, it's best to find a firm run by someone you've known for a long time, like Balasa and Dinverno did, so you have a good idea just how the person works and whether you like each other enough to join forces. Once you start talking, expect to spend at least six months determining whether you've found a good match.

Once the merger is done, how should you and your new partners divvy up responsibilities — and revenues? There are a few ways to go about it. One is to combine forces, but not share clients or revenues — a refined version of “eat what you kill.” Take Matthew Chope of Center for Financial Planning, for example. Ten years ago, he merged his Southfield, Mich., solo practice with a much more established firm. The firm's two partners, who had been running it for 20 years, were looking to join forces with a younger, more technologically savvy partner. For Chope, the move promised an opportunity to gain from their industry expertise and to improve operational efficiency by creating a centralized technology platform. Nonetheless, Chope doesn't share revenues with his partners; he keeps about 50 percent for himself and pools the rest to pay for office infrastructure. For new clients referred to him by his partners, he retains 60 percent of revenues for three to five years, after which point he keeps it all. Over time, the partners (there is now a fourth) have managed to amass $650 million in assets under management.

Role Playing

But for long-term growth, merger-&-acquisition experts say the better approach is to complete a true merger. That means not only sharing clients and revenues, but also making sure that the partners each focus on different and complementary areas of specialization. “If you don't play different roles, there will be head-butting,” says Maiorano. Specialization will also allow you to expand the number and depth of services you can offer your clients.

In this regard, Balasa and Dinverno were very well matched. Balasa was more focused on technology and investments, while his partner excelled at practice management and process. In fact, Balasa credits much of their success to his partner's strengths, pointing to the more systematized financial-planning model he developed soon after the merger. “We were able to train the entire staff to follow these processes,” he says. “If we'd used my old approach, it would have stalled growth.”

It's also important to have a clear chain of command for decision-making, in order to avoid confusion and clashes. Hannahs, for example, has a somewhat elaborate system, including weekly reviews of the business, monthly marketing meetings and quarterly partner meetings where major initiatives and personnel issues are discussed. In any gathering, majority rules: Three out of four planners have to agree on a decision for it to go into effect. At Balasa Dinverno, all partners have to agree unanimously on issues like taking out debt or selling the firm.

You'll also need to decide on how to handle your staff. Often, advisors don't eliminate employees because they still need every hand on deck, according to Palaveev. Instead, they reassign responsibilities. After they merged, for example, Hannahs and his partners asked their staff what jobs they preferred and, based largely on those answers, reassigned duties, creating more specialized positions, such as paraplanning or insurance administration.

But, perhaps the most crucial imperative is legal: signing initial buy-sell and partnership agreements. These should lay out in writing everything from ownership stake to specific responsibilities. The more detail, the better. For example, it's a good idea to build in an escape clause, ensuring the possibility of your bailing out if you decide that the move isn't working well. Balasa, for example, stipulated an 18-month period during which, if any partner decided he wanted out, he could leave with his clients, with no financial penalties.

Ultimately, no matter how successful your relationship is, you still may find it hard to get used to giving up total control — deciding what new type of computer equipment to buy or whether you should fly first-class. And that may never go away entirely. “I ran my practice for 18 years before we merged,” says Neal. “It's still hard for me to let go.”

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