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Avoiding Costly M&A Mistakes While Driving Inorganic Growth

A trial-and-error approach to financial advisor acquisitions raises greater risks than ever.

Greater waves of Americans needing professional financial guidance, combined with a rising shortage of financial advisors, create an unprecedented opportunity for independent wealth managers to grow their businesses—and in the process, create enduring value for their own families.

The obvious way to achieve such growth is through traditional organic strategies focused on client prospecting, relationship development and asset consolidation. But for independent wealth managers seeking multiple paths to drive accelerated enterprise value in their businesses, M&A should be seriously considered.

Indeed, with so many older financial advisors entering retirement, independent wealth managers with longer career runways and entrepreneurial spirit are increasingly enticed by the potential of successful deal-making to do just that.

So, What’s the Problem?

But here’s the crucial problem: All too frequently, M&A for independent wealth managers has been driven through costly trial-and-error experiences.  

This point became clear to me after a recent conversation with a friend who runs a wealth management business and is just starting on his second M&A deal. He confessed to making a number of rookie mistakes on his first deal. He was hoping to apply what he learned to at least break even on his second deal. And by the third deal, he figured he’d have it all worked out.  

What I took from this exchange was that while learning from mistakes is not a bad thing in life, it can be an incredibly costly way for a wealth manager to get better at a crucial growth function. 

Instead of approaching M&A with a trial-and-error mindset, why not try to do everything possible to get it right the first time? That’s where affiliating with a good partner can make all the difference.

To be successful in M&A, developing a scalable, repeatable and savvy process from the onset—versus a third swing at the plate—is imperative. A cornerstone of this process is creating a sound due diligence approach that starts with one vital strategic question: Will this acquisition add to existing strengths of the business, or does it fill vital gaps that current capabilities cannot address?

If the answer is no to both items, then this is a transaction not worth pursuing. As for the specific criteria to guide the diligence process, there are five key considerations: customer demographics, geography, asset allocation makeup, services the selling advisor offers clients and—finally—historical performance of the business. 

Surging Complexities of Valuation and Financing

When we were all awash in capital, thanks to a record low interest rate environment, valuation and financing mistakes, while costly, were survivable.

But those days are gone. Now, once there is comfort with the strategic fit of an acquisition, a carefully thought out valuation methodology to avoid overpaying for potential growth is pivotal. 

Make no mistake, the downside risks of getting deal valuations wrong in an environment characterized by volatile markets and rising interest rates can be nothing short of brutal.

All of which also underscores the surging complexities of deal financing these days. Certainly, wealth manager business owners can make this part of the process easier by providing M&A financing directly or in combination with credible third-party lenders. 

With credit tighter and funding terms more stringent, it isn’t just about who provides financing—the devil is very much in the term sheet details. 

Strategy Is Execution

Moreover, who cares if an acquisition process is successful, only for integration efforts to be ineffective? The moment the deal is struck, the movement of client accounts and assets needs to follow a deliberate plan to ensure a smooth transition that causes minimal disruption to the purchasing advisor’s business, team and, most importantly, clients. 

To ensure the acquisition is quickly additive to their bottom line, acquirers must determine how long the selling advisor will stay in the picture, how to manage client relationships and what changes to portfolios to make in order to closely align investment philosophies. 

Going into the process with a clear idea of these details and how to manage them will mark the difference between success and failure.

Understanding Trade-Offs 

Of course, there is one constant in a fast-evolving industry landscape: For financial advisors, time continues to be finite and therefore precious. M&A requires allocating a significant amount of a finite volume of time to find deals, conduct research, submit bids and complete transactions. 

In many ways, it is the ultimate opportunity cost issue: The time that independent wealth managers spend working on deals is time away from client relationship management and organic growth efforts.

This is why independent wealth managers seeking to grow via M&A cannot afford to align with partner firms that offer anything less than comprehensive and hands-on deal and post-deal integration support.

Collaborating with a partner that can provide turnkey acquisition expertise, resources and planning support, can liberate much of the time needed to remain focused on existing business and client prospecting.

In my 30-plus years of experience, I’ve seen deals work extremely well when there are synergies, solid cultural fits and realistic expectations on both sides. I’ve also seen deals collapse under the weight of complicated structures and poor fundamental assumptions. 

Without question, M&A offers an incredible pathway to successful growth. But caveat emptor for those who go it alone or proceed without the right partner firm and resources. 


Adam Malamed is CEO of Sanctuary Wealth, the industry-leading platform for elite wealth managers.

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