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An Insider’s Guide to the Due Diligence Process

Tips, tricks, and best practices to eliminate the angst experienced by many advisors who embark on the journey of exploration.

Most advisors vehemently dislike conducting the due diligence necessary when considering a move. And while it may be a necessary evil, it’s a process that gets your business where you want it to be.

Sure, the due diligence process is daunting, cumbersome and time-consuming, and it opens the door to the prospect of a very scary and life-altering change. But above all, I think advisors dislike it because it’s shrouded in uncertainty and lack of clarity. If advisors knew exactly what to expect from the process, perhaps they would not find it so painful.

Why is the due diligence process so important?

To calm some of the fear, let’s start with the basics: What is strategic due diligence? At its simplest, due diligence is the dating game for finding a new potential firm. It’s about vetting firms and models through the lens of your business, your clients and your vision for the future.

Essentially, it boils down to three critical decisions: If you are going to move, where you are going to go, and when you are going to move.

Conducting due diligence does not mean making a move is a foregone conclusion. On the contrary, due diligence can be a great exercise in introspection, and advisors often re-commit to their current firm with renewed vigor.

What does the process look like?

With the notion of mystery in mind, here is what to reasonably expect once you decide which firm or firms to engage with. We suggest engaging with at least three for comparative purposes. The process typically entails the following steps (not necessarily in this order):

  • Introductory meeting (often held via Zoom in a post-COVID world) with the business development team or firm leadership
  • Technology demo
  • Investment platform overview
  • Economic/pro forma discussion
  • Offer review and negotiation
  • Home office visit

There are, of course, many other steps along the way (e.g., a call with an existing advisor on the platform, legal/attorney review, investment portability analysis, etc.). Still, the above cadence offers a basic framework.

What are some “insider tips” to help guide the process?

  1. Due diligence is a 2-way street. Many advisors think they hold all the cards in the recruiting process. And to some extent, they’re right. While true that it’s a strong sellers’ market, it’s imperative that you continue to demonstrate interest and show buy-in. All recruiting deals have a subjective element, and firm leadership endorsements help ensure the best economics (and experience) possible.
  2. Remember your due diligence “D words.” Do be detail-oriented, direct, and driven. Do NOT be discourteous, disrespectful, dismissive, or derisive. Even with tremendous strides in technology over recent years, recruiting (and therefore due diligence) remains a deeply personal process. Remember that you’re dealing with real people, not machines.
  3. Deal matters, but only to an extent. I get it: Moving is risky, and you deserve to be compensated for that risk. Transition deals represent an excellent way to monetize your life’s work. But in our experience, decisions based solely on transition deals are seldom the right ones. Remember that upfront deals are not the only economic consideration when making a move: The ability to grow, keep more of what you earn, and path to sell or sunset at day’s end are also key factors.
  4. View everything through the lens of your clients and your team. Most advisors are concerned with how their day-to-day will change when considering a new firm. There’s nothing wrong with that, but I counsel advisors to think first from their clients’ perspective. What will they think of the move? Does the new firm have the resources, capabilities, platform, and client-facing technology they need? Secondarily, don’t forget about your support staff. They are critical stakeholders and often bear the brunt of a transition for better or worse. Remember that people (clients, support staff, advisors, etc.) tend to view a move through the “WIFM” (or “What’s in it for me?”) lens. Clients, for example, don’t necessarily care that your new potential firm has better advisor workstations. Still, they assuredly do care that it enables you to deliver them better products and service.
  5. Do not be discouraged if firms say “no” or the process gets overwhelming. Not every firm is a fit for every advisor. That’s perfectly fine. It’s part of why it’s essential to consider more than just one firm. A “no” from one firm brings you closer to a “yes” from another. And if the process gets overwhelming, remember the wise words of Coach Ted Lasso: “Taking on a challenge is a lot like riding a horse, isn’t it? If you’re comfortable while you’re doing it, you’re probably doing it wrong.”
  6. Ask thoughtful questions. Advisors often ask me prior to diligence meetings what questions they should ask. They fear it’s a test or a game in some way. But the reality is, it’s better to be direct and ask all the questions that are on your mind. Have concerns about the firm’s brand? Express that respectfully. Worried the investment platform is weak? Tell the firm so they can address it and possibly demonstrate otherwise. Cards on the table by all parties is the best and easiest path towards a deal.
  7. Take a long-term view. Remember that your business is just that: It’s a business, and it should exist and thrive long past your transition to a new firm. While it’s easy to get intoxicated by the sizeable upfront transition packages firms put in place to incentivize recruits, it’s always best to begin with the end in mind. Said another way, first think about what you ultimately want your practice to look like, and then strategize around which firm or model best helps you get there.

When looking at the due diligence process as a whole, there’s no question that it’s a lot of work to get from A to Z. But with some clarity on the process, and best practices in your back pocket, it’s likely to be a bit less daunting.

Jason Diamond is Vice President, Senior Consultant of Diamond Consultants—a nationally-recognized recruiting and consulting firm based in Morristown, N.J. that focuses on serving financial advisors, independent business owners and financial services firms.

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