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Merging your RIA Firm: Do your Philosophies Align?

Merging your RIA Firm: Do your Philosophies Align?

More and more RIA firms are realizing that merging with another firm is an excellent way to grow both practices, streamline processes, and provide better service to clients. According to a report from Schwab Advisor Services, there were 54 RIA mergers in 2013, totaling more than $43 billion in assets under management.

The Schwab report also showed that mergers aren't just for the big boys. Nearly 25 percent of survey respondents who had between $100 million and $250 million in AUM said that they were actively looking to acquire another firm. Why? Because in this competitive environment, acquisitions are one of the most effective ways to grow AUM.

However, that doesn't mean you should merge just because it will bring more assets in the door. In fact, there are many issues that can derail a merger and all of those issues should be thoroughly reviewed before merger discussions advance to a serious stage.


Philosophy is a critical component in merger success

One of the most important factors in determining whether a merger will be successful is whether there is alignment between the philosophies of the two firms. While it may be either explicitly stated or simply understood, you can be sure that your firm is guided by an operating philosophy. It likely includes how you interact with clients, the types of investments you recommend, and how you treat employees.

Similarly, any firm that you may merge with will have its own operating philosophy. If that philosophy is in contrast with yours, the merger will be difficult - if not impossible - to pull off. One firm will be forced to change the way it operates on a fundamental level. That kind of change is often met with great resistance.

Before you enter into substantive talks to merge with another firm, be sure to have a serious discussion about the firm's philosophy. You should get a firm understanding of how the firm views the following areas:

  • Client relationships. Does the firm value deep and personal relationships with a small number of high-asset clients? Or does the firm work in volume, maintaining low-maintenance, and shallow relationships with a high number of clients? Also, what's the firm's stance on service? Do they go to any lengths to meet a client's needs or do they stick to a formal set of services?
  • Prospecting. What approach does the firm take to on boarding new clients? Do they have defined qualifications or will they take anyone who meets the account minimums? How do they prospect? Are they referral only or do they mass market?
  • Investment recommendations. You probably know how diverse investment management philosophies can be among RIAs. Does the other firm's investment philosophy align with yours? Do they recommend any investments or products that you are absolutely opposed to? Do they expect you to change your investment philosophy?
  • Employees. How do they treat their employees? What kinds of compensation and benefits do they provide? Do they actively recruit and train new talent? Are they looking to grow in the number of advisors they have or would they prefer to maintain their current size?


Philosophy differences can be a deal breaker

There's usually no amount of money that can resolve fundamental philosophy differences. Some RIAs find this out the hard way, going ahead with the merger only to see it fall apart after the fact.

You can avoid this by doing your due diligence before you merge. It may take several meetings and conversations, but it's worth investing the time before you get too far into discussions. Recognizing a philosophical difference early could save you time and money later.



Phillip Flakes is Co-Founder and CEO of Succession Link

TAGS: Careers
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