Number of advisor teamsRIA firms 650RIA assets under custody 104 billion

Why Even the Best-Laid M&A Deals in Wealth Management Can Fail

A lot can go wrong if a buyer doesn’t look under the hood.

Even the most logical, well-thought-out mergers and acquisitions between wealth management firms can fail. But companies can do a lot to make sure they identify a bad fit before it's too late.

That was the message Elizabeth Nesvold, founder and managing partner of Silver Lane Advisors, shared with attendees at BNY Mellon's Pershing Advisor Solutions Regional Symposium at The Pierre hotel in New York City on Wednesday.

Nesvold has personally advised on more than 150 completed M&A, valuation and strategic-advisory engagements in her career and spent an hour explaining pitfalls financial advisory firms should watch out for.

Before her presentation, she asked for a show of hands in the hotel ballroom (full of advisors that custody with Pershing) whether they might be or have already been the buyer of another firm. Roughly one-third raised their hands, effectively acknowledging they are part of a growing trend within the industry. Nesvold said she remembered a time when there were only a few deals each year. In 2016, she said, there were as many as 400.

She explained that the aging advisor workforce plays a part in the trend. Some firms are looking for a partner or group that can carry the torch when they retire.

Others want to buy a firm in an effort to reach what Nesvold called “critical mass,” or a threshold at which a firm becomes a viable business (a number she said used to be $200 million, but now even $1 billion isn’t a “home-free” number).

Some buyers just want to diversify their businesses; bring in a partner or purchase a firm that is better at something than they are, whether it's working with a specific type of client or adopting better technology.

Sellers want a fair value for their businesses and to reap some of the same benefits (perhaps they are the one adopting better technology, for example), among other things.

But none of the above are necessarily difficult for parties on either side of a deal to identify. It is effectively a list of their wants or needs. The pitfalls after that are what Nesvold cautioned advisors in attendance to look out for.

Before considering any specifics of a deal, there needs to be “chemistry” between parties; they can’t just be a good fit on paper.

“If you don’t have [chemistry], there’s no reason to get to the second piece,” Nesvold said. “You’ve got to nail the first one right up front.”

Firm ownership might assume some matters can wait until after a deal is done, but that’s a mistake, she said. In addition to where partners might be domiciled, who will be the CEO, president or managing partner, and even the frequency of management meetings could be points of contention and should be talked about before a deal closes.

Nesvold also stressed the importance of looking under the hood at an advisory firm’s book of clients.

While working on a deal with a $2 billion firm, she said signs pointed in the right direction—the deal could happen— until she took a closer look at the seller’s clients, who were aging out. Most were in their 60s and 70s, and too few family members and children were working with the seller. In the near future, the seller would begin rapidly losing assets, but the terms of the deal didn’t reflect that. When Nesvold’s client, who was enthusiastic about the deal otherwise, asked if they should go through with it, she said, “No way.”

Another hurdle she mentioned: keeping the new employees on board. A seller's business might prove to be a good investment, but buyers need to make sure incoming employees are incentivized to continue to produce.

Unlike books of business that might be long in the tooth, losing talent after a deal should be thought about and mitigated beforehand. Otherwise a great deal could turn sour after its done.

One attendee asked how successful mergers and acquisitions are in wealth management, and Nesvold said about half succeed. Even the “best-laid plans” can fail.

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