M&A provides many benefits to the wealth management space. It assists firms in gaining access to technology and other support that saves advisors time, streamlines their work, and improves client experience. It provides tools for the succession planning of an advisor population nearing retirement, and allows advisors to monetize their business while providing future care for their clients. In addition, private equity firms and other capital sources provide more than capital – they consult and guide their acquirees for growth and success.
But M&A isn’t perfect, and this year I have been speaking about an unfolding trend in wealth management M&A: Firms often make acquisitions before fully developing a plan to integrate the acquired firms. I call this “indigestion,” and believe acquirers and capital providers can overcome it when they find themselves in this situation, though it may require taking a breather from rapid acquisition to fill in the gaps on the drawing board for harmonizing entities under the corporate umbrella.
In this review of the wealth management M&A space for the final quarter of 2024, I explore the indigestion topic with Dan Newhall, Principal of Lone Willow Advisors, a sell-side M&A advisory boutique; Matt Sonnen, Chief Operating Officer of Coldstream, an employee-owned financial services firm based in the Pacific Northwest; and John Wernz, Entrepreneur-in-Residence at Great Hill Partners and former Chief Marketing Officer at Wealth Enhancement Group, one of the most successful integrators.
Acquired But Not Integrated
Wernz defines the problem well: “There are a group of newer or smaller acquirers that are more concerned with getting a deal done than what the entity will look like when complete. These consolidators struggle with post-acquisition efficiency and continued growth and often need to learn the pitfalls of this lack of planning.” Wernz contrasts these with firms that demonstrate success in the long term because they “are forged on building a single playbook.”
Newhall agrees with Wernz that smaller firms encounter this problem more frequently, stating that larger firms typically have “a fully baked plan about 80-90% of the time,” in constrast to smaller firms that “are more likely to be building the plane as it’s landing.” Newhall says that integration isn’t a problem, but rather a challenge where good acquirers can demonstrate their abilities.
“I think this is a huge problem in our industry!” says Sonnen, who points out that integrators without a plan in place “completely miss the fact that integration is where the happiness, satisfaction, and profits will come from with the merger.”
Catching Up
When an acquirer finds itself in this situation, there’s plenty that can be done to get integration back on track.
Newhall suggests hiring an integration strategy firm. “It takes some of the operational burden off of the acquirer and can provide a roadmap for future integrations.”
Sonnen advises, “Focus on process, not technology. The mere fact that a seller is using the same CRM as the buyer doesn’t mean both firms are using the tools in the same manner. Both firms may be using the same rebalancing software, but their approach to portfolio construction can be very different. Align on process first, the technology integration should be easier.”
“More refined firms have a detailed value proposition that helps guide them” as they plan, according to Wernz. “This might be efficiency, organic growth or other value drivers.”
Crafting A Successful Plan
Not every plan will lead to success. The acquirer needs to work backwards from the end vision to a plan that achieves that vision. And the clock is ticking – the time frame for hitting targets is critical because ROIs and efficiency are based on accomplishing goals by deadlines. In other words, performance isn’t just how many miles you clock on the odometer, it’s miles per hour.
Newhall emphasizes the structure of integration timelines: “Having a clear timeline and plan around immediate integration needs and things that can be done over time is key. Sometimes firms get caught up in a tech, operations, growth or people integration that can wait, whereas the regulatory, client communication, custodial agreements and legal are all things that need immediate focus and attention.”
Sonnen says that acquirers should get over a fear of overwhelming the seller with too much detail in the integration plan. “The best integration plans are the most detailed integration plans. The integration plan needs to spell out exactly how the seller’s business will continue under the acquirer’s umbrella.”
“The plan needs to be tied to the reason you partnered in the first place,” says Wernz. “The goal of why you came together is what will drive the most change.”
Is A Plan Even Necessary?
Some firms have seen varying degrees of success without integrating acquisitions, choosing to operate more as a holding company with similar but distinct businesses under the corporate umbrella, each having its own brand, leadership, operations and tech stack.
This raises the question of whether an integration plan is even necessary. According to Wernz, it is. “I believe a detailed integration plan is highly necessary if your goal is a long-term successful firm with a strong culture.”
Wernz acknowledges that a holding company-type setup can be successful, but warns “in fewer cases does this result in a long-term and growing firm. If you are looking for more than a check and to be part of a long-term, growing entity, I’d require a detailed integration plan.”
Newhall sees this alternative as a strategy choice: “Selling a unified, centralized firm that is enterprise ready will typically command a higher valuation. However, some firms are able to grow more quickly by allowing for more firm autonomy within their acquisition strategy.”
However, Newhall cautions that this choice isn’t easily undone. “This is a strategic push and pull that needs to be defined early by the acquirer because changing paths down the road can create significant headaches.”
Like Newhall, Sonnen points out that onboarding sellers with a message of allowing them to continue as they are can be attractive, but ultimately believes “it is much more profitable to fully integrate the branding and processes of the businesses you have acquired.”
Sonnen points to a current industry example: “The most famous serial acquirer in our industry, Focus Financial, is currently unwinding their ‘holding company’ model and turning to an integration model.”
Temporary Or Enduring?
Wealth management M&A will continue in strength for the foreseeable future, and the lack of planning for integrations is likely to follow it. It’s a sellers market for now, meaning acquirers and capital providers are willing to do what they must to attract sellers and ensure transactions close – often meaning the realities of post-closing life can be glossed over until the deal is inked.
Wernz’s assessment is similar to mine. “I believe the problem of poor integration planning will continue for new entrants as they learn the importance and necessity of a plan and as firms are under a lot of pressure to get deals done. The pressure to get deals done leads to cutting corners and not sticking to the ‘one firm’ mantra.”
Sonnen says that a track record of successful integrations is necessary for buyers to win future deals. “Acquirers not focused on integration will get naturally selected out of the pool of potential buyers that sellers will consider. The only buyers left will be those focused on post-deal planning.”
Newhall believes that acquirers will rise to the challenge and raise the level of their post-transaction integration planning. “I think as technology improves and consolidation continues, the ability to integrate will improve and smaller acquirers will become more sophisticated in their approach.”
He adds a word of advice for acquirers: “Much like home improvements, there are some areas that create more enterprise value than others, and understanding these areas and how they apply to your specific strategy and desired outcome is critical for success.”
This article was written by Larry Roth, CEO of Wealth Solutions Report and Managing Partner at RLR Strategic Partners. The article originally appeared on Wealth Solutions Report.