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Why Your Firm's Infrastructure Is Key to M&A Growth

How to avoid missing the boat on what may be turning into a buyer’s market.

By Timothy Stinson

After some twists and turns earlier in the year, the first implementation phase of the Department of Labor's (DOL) fiduciary rule has begun. The potential increase in regulatory costs and complexity for the retail financial-advice space has created a cascade of activity. This includes many older, independent advisors accelerating their planned retirements from the industry versus spending their remaining working years reinventing their business model to comply with the fiduciary standard, or potentially wading through a host of other new regulations. 

As a result, younger independent advisors could now have greater opportunities to grow through acquisition. But in addition to the variables that typically influence deal-making in this space—such as culture, organizational structure and client synergies—in this new fiduciary era it's increasingly clear that having the right wealth management infrastructure will also be a key differentiating factor in M&A deals.

A seamless wealth management infrastructure drives client loyalty

Today’s investors are operating in a world in which the basics of wealth management have become commoditized, thanks in large part to the emergence of robo advice solutions and the proliferation of low-cost, third-party asset managers. This has increased the importance of advisors having wealth management solutions that are seamlessly integrated. Indeed, tools that are a mishmash of multiple loosely connected parts typically result in a poor client experience, and given the expectations of today’s increasingly tech-savvy investor, that’s a risk that no advisor should take with their business.

Redefining what constitutes a good M&A fit between independent businesses

While nearly every advisor knows that a satisfied client is a loyal client, this is an especially pivotal consideration for sellers of well-established independent advisory businesses. After all, a significant part of the value of an independent advisory business is the ability of the purchaser to realize the ongoing revenue streams from client relationships that stick around after a deal has been executed.

Naturally, that means that sellers need to seek out buyers that have the scale, resources and expertise to comfortably incorporate a large number of clients into their practice. More and more, a big part of this equation is realizing that would-be acquirers with a splintered set of wealth management offerings may not be up to that task, since that type of disarray could generate higher levels of dissatisfaction among newly onboarded clients and, thus, produce defections.  

Leveraging scale to enhance the advisor-client relationship 

It's one thing to recognize the value of smoothly integrated, end-to-end wealth management infrastructure. But it's another thing entirely for most independent advisors to put it in place. That goes even for well-resourced, aspiring buyers. With that in mind, the following are some important elements to focus on:

  • How many custodial platforms are you working with?  It's common to hear two wildly divergent views on this subject. Some believe that more custodial relationships are inherently a positive thing, while others say precisely the opposite. The reality, however, is that the number of custodians is far less relevant than how effectively integrated the different platforms are in terms of data transfer, normalization and utilization for table stakes items like financial reporting, centralized workstation access and consumer-friendly accessibility.
  • Where and how are your investment programs sourced? Frequently, advisors have different investment programs simply for the sake of diversity. Unfortunately, having multiple investment programs can backfire if they all come from different sources, since such an arrangement could make it more difficult for advisors to clearly define their investment process and best-interest recommendations. As we all know, there is now a premium on being able to access platforms that augment compliance responsibilities, boost transparency and deliver advice-based tools that make planning a more collaborative process—and consolidating investment programs is potentially one way to get closer to those goals.  
  • Does your platform deliver a “delightful” client experience? Perhaps the biggest challenge facing advisors going forward will be creating a client experience that makes them unique from the rest of their peers. Today’s consumers expect collaborative decision-making, transparency and easy-to-use tools/apps that provide worldwide access. Delivering these experiences is incredibly difficult, requiring advisors to meld technology, people and processes in a rapidly changing industry that seems to come under more margin compression each day. But advisors who can’t deliver them consistently will see their business erode.

For years, we’ve been in a strong seller’s market for financial-advisory practices. But as experienced, successful advisors choose to accelerate their departure from the industry, conditions could begin to favor buyers.

If these accelerated departures come to fruition, this will either be a chance to achieve growth by acquisition or an enormous missed opportunity for those who may have the interest and all the right intentions but not the right wealth management infrastructure in place to capitalize on this trend.


Timothy Stinson is national sales manager for wealth management and advisory products and services at Cetera Financial Group.

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