So your wealth firm has been acquired. Now what?

Veteran consultant to independent dealers and portfolio managers outlines questions advisors should ask

So your wealth firm has been acquired. Now what?

Against a backdrop of economic uncertainty and less-certain outlook in investment markets, there’s been a recent spate of headlines about financial firms in the wealth space getting snapped up by larger organizations.

That includes the high-profile acquisition of First Republic Bank in the U.S. by JPMorgan Chase this week. In the prior weeks, several advisor teams from the beleaguered bank’s private wealth platform left to join rivals including Morgan Stanley, UBS Group, AG, and Royal Bank of Canada.

To be sure, the First Republic acquisition was arguably a unique case. But there are several trends driving up acquisition volume more broadly across the industry, which begs several important questions for advisors swept up in the wave.

“The retail market isn't growing as aggressively or as robustly as it did in the ‘80s and ‘90s,” says Vipool Desai, president and co-founder of Ara Compliance. “You're seeing the gradual retirement of the baby boomers and slowing growth of AUM in the retail space. As a result, the retail market is somewhat mature in Canada.”

A harder growth market for wealth firms

While immigration and the rise of millennials are certainly helping, Desai doesn’t think it’s enough to offset the slowing growth of the Canadian retail wealth market in the immediate to medium term.

“In an environment like the earlier decades, where investable assets were growing, an organic growth strategy made sense: you hire advisors, you train them, you teach them how to sell, and you grow organically. And it's cheaper too,” he says. “However, if you're a large institution in the current maturing market, organic growth is a difficult hill to climb. The easiest and most viable path forward is through acquisition.”  

Fortunately, there appears to be a growing supply of existing AUM available for acquisition. Desai says many industry veterans are sitting on sizable books, nurtured and grown during the prior decades.

As those advisors approach retirement, they are actively searching for an exit strategy. The increasing demand and supply of exiting books, he says, are fuelling acquisitions in the securities industry.

“This trend has also given rise to what I call ‘aggregator firms’ – registered firms whose sole purpose is gobble up smaller books of business, bulk up AUM and sell themselves to a larger national firm,” Desai says.

KYA: Know your acquirer

So what should an advisor be thinking about if their dealer firm is acquired?

One thing worth paying attention to, he says, is whether the acquiring company paid a fair price. If it didn’t, the acquirer has to figure out a way to get the golden goose to lay more eggs – in other words, become more profitable more quickly – so it can justify its purchase.

An acquiring firm could cut expenses by playing with the compensation grid, downloading head office expenses to its advisors, downloading administrative tasks, or cutting back on head office operations and client support. Alternatively, it could aggressively grow margin by making a push to cross-sell other products or services within the corporate group or cut unprofitable reps, products, and/or services.

It's also worth considering whether the company has other business objectives in mind. For example, if they are a fund manufacturer, the registered firm they purchase may be viewed as a channel to sell their funds. The advisor must consider whether their own long-term goals and those of the acquirer are in alignment.

When an advisor’s firm is taken over by a public company, Desai says, there’s a greater risk that the new owner’s interests may not align perfectly with theirs. Public companies are under regular scrutiny by sell-side analysts and institutions and must continue to justify their market price. As a result, the acquirer or its parent could take steps to boost short-term valuation metrics or to serve a larger corporate strategy, to the detriment to the of the advisor’s business.

An advisor should ask questions and raise concerns about the impact of the acquisition. However, Desai believes that advisors also need to do their own due diligence and not solely rely on what their firm and the acquirer tells them.

“However, I have much less of a concern with management-led buyouts,” Desai says. “Typically, management understands the business better than third-party acquirers. Hence, there’s less risk they'll overpay and they also know how to run the business effectively.”

The main line for clients: it’s business as usual

When it comes to speaking with clients about the acquisition, Desai says, reassurance is the watchword. The acquiring firm will typically have communication materials that the advisors should take advantage of. 

“The main message should be ‘Things aren’t going to change significantly, your money’s protected and the same advisor or team will continue to personally service your needs.’ If true, the advisor can also add ‘You’ll get better service or lower fees.’ If the acquirer is a larger and more credible institution, that should be pointed out that as well.”

The path less taken

Even if a change in corporate ownership does not cause earth-shattering changes, Desai says, advisors should be mindful that the acquiring firm is buying their relationships and compensating the aggregator firm for corralling them. The advisor does not share in the economic value of the roll-up strategy and is not compensated for the disruption created by this move.

Sometimes aggregator firms address this weakness by offering some type of ownership to the advisor or offering to purchase the book using some pre-determined formula, if the firm is acquired. Desai says these are imperfect solutions in many cases, which means advisors with a decent size book and an enterprising spirit may want to make a break for it

“If you have a big-enough book of business, you may want to start your own firm. Other advisors have done so,” he says. “You get to keep 100% of the profits as a taxable small business, run the business the way you need to, and avoid having to accommodate a corporate environment not aligned with your interests. That is something worth considering.”