Every year after tax season, ‘for sale’ signs go up at CPA firms across the country. It’s no wonder. It’s a grueling business that forces accountants to run a marathon-length sprint at tax time to accommodate their clients, most of whom file on April 15. Once it’s over, it’s not uncommon for CPAs who are near retirement age (or even younger!) to call it quits. The result can be a buyer’s market for anyone looking to buy an established firm.
If you’re a financial advisor looking to expand your practice, you know all too well that the process of buying (or selling) another practice hasn’t been so simple in our own industry. That may be because maintaining a book of business is often not as difficult as building it in the first place. Many older advisors therefore can keep their doors open longer and, in some cases, simply lighten the load over time to create a “lifestyle practice.” That allows the advisor to delay retirement indefinitely, and it keeps their clients happy as well. This reality has made it a challenge for advisors who want to expand their own practices by purchasing another firm. Companies like FP Transitions and Succession Link who specialize in bringing the buyers and sellers of advisory firms have reported that for every seller on their sites, they have between 30 and 50 potential buyers. That’s a lot of competition!
The good news: the game may have shifted entirely with the announcement of the final DOL fiduciary rule. By April 2017, advisors must comply with the new rule that include changes to producer compensation, products, and compliance. Advisors who operate commission-based practices are facing a transition—and for those one-third of advisors who are nearing retirement, it just may not be worth the trouble.
That’s great news if you’ve been thinking about expanding your own practice. Thanks to the DOL, the number of ‘for sale’ signs on advisory practices is likely to escalate in the next 12 months, and for the first time in ages, there may be more sellers than buyers. If you’re ready to consider the opportunity, here are five things to keep in mind:
1. Choose a firm with similar values
Taking on a practice is a complex, “Brady Bunch” challenge. Take the time to be sure your philosophy and culture are aligned. If your focus is financial planning, an investment-focused firm won’t be a natural fit. The same is true for active versus passive investment styles. From a team perspective, synergy with your own team will go a long way to reduce integration pains. The same goes for the clients. Some advisor’s clients might be used to “kitchen table” meetings versus having to come to your office, some may prefer a more formal setting and some may prefer a more “robo” approach. Think through which differences you can live with—and which you can’t (or shouldn’t).
2. Consider technology
Technology is another challenge. Whether it’s a CRM system, the clearing firm used or other key systems, evaluating and understanding your target’s technology platform is a key consideration. This is especially true now that “robo” strategies are becoming more important to growing practices. Of course, if you’ve found the perfect firm, their technology platform (or lack thereof) needn’t be a deal breaker, but it will need to be addressed – particularly if your technology platform is not completely defined and built.
3. Consider transitioning new clients to fee-only
Since you’re going to have to initiate contracts with each new client at the time of the business transition, you may want to introduce a fee-only structure from day one. Discuss why a fee-only agreement may be best for the client and clearly lay out how much they’ll be charged each quarter and what they receive in return.
4. Make client retention your #1 priority
No book of business is worth the price if you don’t retain the clients. Work with the seller to create a strong client communication plan with his or her client base. Get introduced personally when you can to be sure the transition is relationship based, not paper based. To incent the selling advisor’s involvement, consider structuring the selling price on a percentage of retained clients or assets under management measured at specific time frames in the future.
5. Don’t rush the transition
Even if the seller is ready to call it quits yesterday, a smooth transition is vital to client retention. Many sellers are willing to work together with a buyer for a period of time to assist with the details of account transfers and to hold their clients hands through the change. In this relationship-based business, a smooth, careful transition can be the difference between simply taking on more work and achieving your long-term plans for your growing practice.
Keeping these five things at the top of your mind and setting up conscious processes around them will help maximize the opportunity of buying another advisor’s business. I can’t say that the post-DOL environment will increase advisory practices up for sale in a similar way that CPA practices are for sale after April 15, but being prepared for the opportunity will give you the best chance for success.