It happens all too often. An advisor down the street is retiring, and buying his or her practice could be a quick way to pick up some assets. But advisors who go about buying a book of business in this way are less likely to have a successful acquisition, according to a recent NFP Advisor Services study, conducted by Aite Group. In fact, 70 percent of FAs who were least satisfied with their acquisition looked for their acquisition targets in two years or less, versus only 32 percent of FAs who were most satisfied with their acquisition.
“There are a lot of shotgun weddings,” said James Poer, president of NFP Advisor Services. “Picking up a quick book is a less thoughtful way to buy a business and therefore it’s more prone to making acquisition mistakes and transition mistakes.”
Those who take their time looking for an acquisition target (three years or more) are typically more intentional about what they’re trying to achieve, Poer said.
“Those who are more thoughtful and intentional about how they do it are likely to pass on the guy who pops up down the street, and they’re likely to be more targeted in finding companies that are more aligned with how they already serve and manage a client base,” he said.
The study is based on an online Aite Group survey of 401 financial advisors. It analyzed the statistical differences between advisors who were “very satisfied” with their acquisition (called alpha acquisitions), advisors who were “satisfied” with the purchase (near-alpha acquisitions), and advisors who would not make the acquisition again (non-alpha acquisitions).
It’s been conventional wisdom that a lot of advisors don’t know how to truly value a business, Poer said. In alpha acquisitions—those that are more successful, advisors relied more on assets under management, client service model, revenue mix, business longevity and cash flow from operations to determine the value of the firm. Meanwhile, less successful acquisitions looked at age of clients and areas of specialization more so than other advisors.
“People tend to look at assets under management, and they get really enamored by it,” Poer said. “How those assets are managed matter in terms of the true value that you can derive from an acquisition. So that client service model is extremely important. That revenue mix is extremely important.”
A better client service model is one that streamlines the client experience, making it similar across all clients, Poer added.
<“A lot of advisors have what I would refer to as ‘a random accumulation of stuff,’ meaning the client experience could be very different from client to client over a number of five years.”
The survey also found a strong correlation between more successful acquisitions and price. In alpha acquisitions, for example, practices being bought command 1.55 times revenue on average, versus 1.27 times revenue for practices bought in non-alpha situations.
“While there are certainly exceptions, it is safe to assume that advisors have to pay a higher revenue multiple to gain a higher-quality practice,” the report said.
An advisor’s business is often the most valuable asset they have in their life.
“Yet, advisors are often less strategic about it long-term than they are their home or their boat or their car,” Poer said.