Schwab IMPACT panel: M&A deals should enhance advisory firms, not just expand them

Merger-and-acquisition deals among registered investment advisers -- which appear poised to set a new record this year -- should be done not to make firms better, not just bigger, said executives on a panel at the Schwab IMPACT 2016 conference in San Diego on Tuesday.

Consulting firm Devoe & Co. has found that 109 M&A transactions involving RIAs have taken place so far in 2016, on pace for a 10% increase over 2015's record total, said managing partner and founder David DeVoe. DeVoe previously was managing director of strategic business development at Charles Schwab Advisor Services.

Michael Nathanson, president and CEO of The Colony Group, said his firm doesn't look at M&A transactions as acquisitions, but as mergers that help attract talent.

“It's a way to get better by bringing people together,” he said.

During the discussion of mergers versus acquisitions, DeVoe recounted when a contract's use of the terms “acquirer” and “acquiree” prompted a firm's principal to rip up the document and refuse to discuss it further.

Rob Francais, CEO of Aspiriant, said M&A should not be an endgame. His firm's goal in such transactions is to align interests at the highest level and meet needs of affluent families and trusted advisers, he said.

“The puzzle in our industry” is how to “capture the value of your organization without compromising” its core values, he said.

Nathanson said cultures of firms involved in an M&A deal should be similar, but not identical, in order for the parties involved to remain open to learning without being defensive.

Michelle Scarver, principal at Exencial Wealth Advisors, described the merger process from a seller's viewpoint. She said her old firm's partners were aligned in wanting the purchasing firm to have strong tax expertise, but they remained flexible -- they were receptive to a merger with a wealth adviser and not necessarily another CPA firm, which they had originally wanted.

DeVoe said that 89% of firms that made RIA acquisitions last year had previously acquired an RIA. He called such firms “M&A ninjas,” which can be effective in ensuring a deal is completed. Their high level of negotiating prowess, however, can pose a challenge for sellers new to M&A, he said.

Nathanson said the No. 1 rule of mergers is to “try your best not to take anything away from your merger partners,” particularly in terms of compensation, because doing so is demoralizing.

For example, advisers who join a firm through a merger might retain their level of pay for their existing book of business, although new business might be subject to a different compensation formula so that all advisers are ultimately paid in the same manner.

“Over time we need to sync things up. But do it without causing destruction,” he said.

One hurdle to M&A can be a “mismatch” regarding a firm's valuation, Nathanson said. Scarver said having a consultant's assistance with valuation was important during her old firm's transaction, because “what we were thinking was not necessarily” what other firms in the industry thought.