- On October 8, 2017
Not all practices are going to be ideal to pursue or purchase. Sometimes the best acquisition you make is the one you didn’t. While growth through acquisitions is the fastest path to rapid growth, each practice is unique and not all buyers and sellers are the right match. In advisory M&A, there is a lot more involved in matching with the right practice for successful retention other than you both primarily do fee based business.
8 cautions to consider to position the acquisitions for maximum retention:
- Internal vs External acquisition
An internal acquisition, where buyer and seller are at the same IBD or use the same clearing firm, will typically have higher retention rates than an external acquisition where the buyer is acquiring a practice at a different broker dealer of custodian. Internal acquisitions are expected to have a 90% or better retention rate but external acquisitions where the clients have to be re-papered can go to 80% to 70% in a hurry if the transition is not properly executed, or a good match.
- Seller commitment
The seller is the key in a smooth and successful transition. Is your seller as concerned as you are about transitioning and retaining their clients? Are they going to stay on (in at least some capacity) for a year or two to help ensure high retention? Or, do they have one foot out the door already and want to only be there for a few months?
- Offsets and claw backs
Are you legally protecting yourself in the asset purchase agreement from lower than industry norm attrition? If the retention after 12 months falls below 90% do you have an offset or claw-back provision allowing for the price of the practice paid to be reduced as well? Is there a financial based reason for the seller to be motivated to do everything they can to help you with transition and retention?
- Resources for transition
The first 3 months are by far the most critical in client transition and retention. Do you have the resources in place and have the time dedicated to meet with all the clients in the first couple of months? Meeting with newly acquired clients 2 to 3 times in the first year will be essential for many practices to maintain strong retention. There is a big difference on planning your time availability to meet with 100 acquired clients vs. 300. Are you maximizing the support resources from your IBD, custodian or firm to assist in client transition? See our free calculator we created to help advisors plan man hours involved in transitioning and retention in the first year.
- Investment philosophy
If your investment philosophy doesn’t line up with the seller’s philosophy then this is a retention disaster waiting to happen. Does the seller provide a passive or active strategy? How conservative or aggressive? What is their approach in bull and bear markets? Trying to get newly acquired clients in totally different strategies upon transition is difficult. The last thing a buyer wants to do is add hundreds of clients that aren’t in sync with the buyer’s investment philosophy.
- Style and Personality
This is often over looked but it is difficult to quantify but important to retention nevertheless. Do the clients your acquiring have preferences that would or would not be a match for your style and personality? Is the seller a type B personality but you’re a type A? For portfolio reviews does the seller use an iPad but you use a yellow pad? Are the clients accustomed to their advisor wearing a tie and your pretty much casual Friday every day?
- Client base diversity
Is there a diverse client makeup with clients in different age groups and investable assets? Is the client base heavily weighted in an age segment you haven’t traditionally been able to connect very well with in your current practice? Are you going to experience a higher retention rate because you are 25 years younger than the seller and 70% of his or her client base?
- Client Preferences
Do you currently do wine and cheese events but the seller takes his or her clients to professional sports games? Do the clients love the fact that the seller comes to their home or office for client meetings and you’ll be asking everyone to come to your office? Did your seller get most of their clients from church or religious networks that wouldn’t see you through the same viewpoint if you don’t believe the same way? Did the 5 biggest clients go to the same college as the seller and they are all avid alumni about a certain sport or program that you will be considered an outsider? Determine the details through detailed discussions with your seller about the preferences they see with their clients, especially the top 25% of the biggest clients, and make sure you are comfortable that the clients preferences are in line with who you are, as an advisor and as a person.
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