Let’s Make a Deal: Insights From Mark Hurley’s Latest, and Greatest

This section of the paper goes on to expand on the idea of the importance of "non-economic" factors in advisory M&A, listing four distinct challenges to advisory firm mergers and sales, and provides a detailed analysis of each one.

Sellers have unrealistic expectations. "Driving this lack of realism is an absurdly optimistic expectation of their firm's likely future profitability as a stand-alone enterprise, despite all the changes that are sweeping through the industry." Those changes are aging client bases, a decrease in the number of millionaires (thanks to the 2008–2009 meltdown and the subsequent sluggish economy), and the aging of the owner-advisors themselves (putting them in an unfavorable need-to-sell position). Hurley rightly points out that these factors combine not only to lower the value of many firms, but also to reduce the bargaining power of many of today's sellers. The result is that fewer deals close than might have done with more realistic owner's valuations.

Buyers have unrealistic expectations. While the above seller expectations have been well-documented by other industry M&A gurus, this is a new, and rather insightful, observation: "Many firms with a stated goal of acquiring other wealth managers are only willing to consider a seller that would be a 'perfect fit'—in other words, a seller with high growth potential, a client base that resembles their own, top-tier professional employees, similar corporate culture and, of course, an identical investment philosophy. In short, typical buyers believe that they should not be troubled to change any of their own operations in connection with an acquisition." As Hurley points out, the sudden increase in the client base of any firm by 75% or 100% (or even 50%) is bound to dramatically change the buying firm. Again, it's the Fiduciary Network team's observation that as transition deals advance toward closing and it becomes clear that the buyers will indeed undergo change, they often get cold feet.

All material acquisitions require material amounts of capital. "Few (if any) wealth managers—or their owners—have the means to finance an acquisition without the assistance of an outside capital provider. Unfortunately, even fewer wealth managers have any experience in raising capital. Consequently, owners of wealth managers tend to be downright delusional when it comes to raising capital to fund an acquisition." This is a problem that I've puzzled over for more than a decade. Even in the rare occasions when buyers and sellers get past their unrealistic expectations, a lack of financing often kills the deals. When will custodians and indie BDs realize they'll have to provide financing for their affiliated firms to be buyers or face the prospect that many of their advisors will be acquired by their competitors?

Buyers and sellers underestimate the degree to which wealth management deals are "three-handed." Hurley writes, "Both buyers and sellers typically fail to recognize the relevance of a third party to the transaction—the successor professionals of the seller." This may be the most important (and the most overlooked) point in the entire paper. As mentioned earlier, the key to any advisory acquisition is the retention of the clients. So, ask yourself which is easier and more likely: the transition of clients to an advisor they've never met or sufficiently exposing a firm's clients to a junior advisor so that they view him or her as "their advisor," and consequently see the sale as "their advisor moving to another firm" rather than the firm being sold? By underestimating the value of their junior advisors to the buyer, Hurley points out that many owner-advisors fail to allow for them to participate in the proceeds from the sale. When the owners realize the sale won't go through without the junior advisors' buy-in, it's a rude awaking that often kills the deal.

Taken together, Hurley's expositions of why many advisory firm acquisitions don't get done provide the best road map that I've seen for how to actually get one of these deals done. At a time when historical numbers of advisory firms are poised to come up for sale, "The Brave New World of Wealth Management" is exactly the right paper at exactly the right time.