If you ever wondered what would make your independent brokerage or financial planning business attractive to a buyer, ask me.
Over the past five years, I've bought four financial planning firms, and have my eye on several others. While I continue to expand my business by adding clients, I believe it's easier to grow through smart acquisitions.
When shopping for a financial planning practice, particularly in this economic climate, there are four things I look for before inking a deal.
First is the seller's broker-dealer affiliation. Sellers should think about looking for a buyer affiliated with the broker-dealer they use. Having the same affiliation is helpful because the transition will be much less stressful for clients. Since their accounts need not be transferred, very little actually changes from the clients' point of view, which increases retention. What's more, your broker-dealer can handle any back-office or compensation issues that arise, which will expedite the sale and ensure a smooth transition.
Because broker-dealers can be so helpful in the sale and acquisition process, I recommend that you inform your B-D of your plans if you decide to sell. They probably can help line up a suitable buyer. Similarly, keep your B-D informed if you are interested in acquiring another advisory firm.
The four firms I bought all were affiliated with my broker-dealer, Woodbury Financial Services Inc. in Woodbury, Minn. Two were in my local community, one was about 100 miles away and one was in a nearby state. I've since closed those offices and brought over any existing employees.
Next, I look for sellers who are willing to stay on for a while after the acquisition. With client confidence at an all-time low, I want sellers who will be there to nurse the transition and reduce attrition. In two of my acquisitions, the sellers wanted to leave the business, but stayed on for a while to help.
Third, I always look at the demographic composition of the book of any potential acquisition. Average client age is important to a buyer of a planning practice, with older clients being particularly attractive. It could take years for a buyer to profit from younger clients with fewer assets and smaller accounts.
Advisers can't change the demographics or composition of their books overnight, but if they are aware of these opportunities when developing their succession plans, they still have time and the ability to make the practice more attractive to potential buyers.
Finally, I look at product composition. At the moment, the most attractive businesses are those whose clients are invested in life insurance, mutual funds, and annuities other than equity index annuities, which have long surrender periods. The buyer shouldn't aim to replace the entire book, but should have flexibility to enhance the acquired clients' portfolios.
Let me also point out a couple of red flags.
One is a business that is highly transactional. In fact, a transaction-oriented business is my first warning sign that the deal will not work out for me. As a certified financial planner, I want a seller whose clients are in sync with my planning-oriented style.
The second red flag is an unplanned transition. No matter what type of succession plan an adviser has in place, an unpredictable situation, such as sudden illness, disability or death, can lead to an unplanned transition. If the seller has died, the buyer is likely working with the widow or another family member, and the previous adviser is not available to oversee the transfer of trust to the buyer.
However, in the event that unforeseen circumstances lead to an un-planned transition, the broker-dealer should get involved to facilitate an internal transition, which will greatly reduce client attrition.
In today's market cycle, I encourage advisers to prepare a succession plan as early as possible. Doing so allows you to develop your business, increase profitability and foster client relationships that will make a practice more attractive to potential buyers.
Mary Sterk, president and founder of Sterk Financial Services Inc. in Sioux City, Iowa, also helps advisers plan acquisitions. She can be reached at marysterk@sterkfinancialservices.com.
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