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These are the ways buyers and sellers commonly fall short when combining firms.

2020 was another banner year for M&A activity in the RIA industry, and while deal makers continue to build on the momentum to execute new transactions, we continue to see buyers make the same common mistakes when integrating the newly acquired business into their own. Below are some of the most often witnessed mistakes we see:

  1. Lacking a Foundation to Support Organic Growth Before Switching to an Inorganic Growth Strategy

If clients are already complaining that the onboarding process of your firm is too slow and/or disjointed, or the data in your client portal is wrong—or if advisors are complaining that their support staff is spread too thin to properly service the business as it is today—attempting to onboard new teams of advisors, employees and clients is not going to be a successful process. You must have a solid foundation on which to build. If things are slipping through the cracks with your existing clients and the number of new clients joining the firm through traditional business development efforts is already overwhelming your staff, you are not ready for M&A.

  1. Not Understanding Who Your Ideal Client Is Today, or What the Ideal Client of the Combined Firm Will Be Once Integration is Complete

It is impossible to know what services to offer—or what price to charge for those services—if you don’t first understand who you are serving. Are you designing this firm to service the ultra-high net worth, or the mass affluent? Are you looking to serve entrepreneurs in their 40s, or divorcees in their 60s?  Each of these client segments have very different needs, and therefore should be offered different products and services at different price points. Some mergers take place because the buyer and seller serve the same market, alternatively, some mergers take place because the buyer is seeking opportunities for a new service offering or new client niche that the seller specializes in. Either way, the combined firm must understand who they are servicing and how the new firm should be organized in order to serve those clients in the most profitable fashion.

  1. Putting the Deal Maker, Who Has No Operations Experience, In Charge of Integration

Knowing the proper price to pay for a business or understanding how to structure the cash/equity/earn out components of a negotiation are extremely valuable skills for anyone in our industry, but that doesn’t necessarily translate into deep operational knowledge. Once a deal is inked, the integration of the two businesses (determining which reporting technology is best for the combined firm; selecting the proper CRM; how to best transfer the data from one database to another; assigning the proper roles and responsibilities across the operations teams of both firms as they begin to work together) should be handed over to someone who has deep operational experience and has intimate knowledge of the inner workings of the technology tools, workflows and processes in place at both organizations. It is critical that the leader of the integration leverages their operational knowledge to develop a plan and collectively motivates the organization to execute that plan.

  1. Assigning Too Many Sub Committees and Thus Spreading Integration Knowledge Too Thin

To gain true operational leverage from a merger, where “1+1 equals 3,” you need to take a holistic approach to both businesses, understand who the combined firm will be servicing, and look to take the best from each firm and make proper adjustments to both in order to build the firm of the future. Many RIAs, when integrating two businesses, never take that 10,000-foot view and get lost in the weeds by splitting the integration teams into silos (“You are the CRM team,” “You are the financial planning team,” etc.) and decisions are made in a vacuum, without the knowledge of how each individual decision will impact the organization as a whole.  Firms making this mistake are wise enough to know it can’t be “Us vs. Them (Buyer vs. Seller),” but they over-complicate things by going from two disparate groups to over 10 different subcommittees, all making decisions on their own – this makes it nearly impossible to build a cohesive firm all rowing in the same direction, looking to service clients in the most profitable fashion.

  1. Assuming Integration Will Be “A Piece of Cake” If Buyer and Seller Are Utilizing Identical Technologies

After both parties agree to terms, the next most daunting task is integrating technology tools—the buyer may be utilizing Salesforce, but the seller may be wed to Redtail for CRM; the buyer may be using eMoney and the seller may be a long-time MoneyGuidePro user, etc. Choosing which technology tool will be used by the new, combined firm and then transferring the data from one system to the other can intimidate the savviest of M&A professionals. But it’s not just the technology tools themselves that need to be considered—it’s the workflows and processes leveraged by both firms while serving clients in the most streamlined fashion that must be accounted for.  For example, one firm may solely leverage the client portal to deliver investment returns and portfolio snapshots to clients, while the other may be tied to static performance reports that need to be emailed every quarter (or every month, in some instances). Many buyers think that if they can find a firm with the same tech stack, the integration process is already 75% complete – but as we stated earlier, if both firms are using those technology tools to service different client niches or serve clients in different ways, there will still be plenty of compromise, adoption, and integration work. 

If the M&A trends of the past few years continue, and we see no reason they won’t, we will see plenty of headline-making mergers in 2021. Buyers will better serve themselves, the sellers, and the employees and clients of both firms by avoiding these common integration mistakes.

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