Hue Partners is proud to share the seventh M&A Confidential article authored by Stephen de Man, Vice President of Dimensional Fund Advisors.
As RIA founders, you’ve built your businesses with passion and dedication. The journey of creating a successful advisory firm is not just about numbers; it’s about relationships, trust, and delivering value to your clients. However, as you contemplate the next chapter—whether it’s selling your business or merging with another firm—it’s crucial to understand the landscape of mergers and acquisitions (M&A) in our industry.
In a recent discussion with Ryan Halls from Hue Partners, I shared insights on the evolving M&A space, particularly focusing on how alignment in investment philosophy and client value is becoming paramount. Let’s dive into these insights, reflecting on the current trends and considerations for RIA founders like you.
Historically, many firms pursued acquisitions primarily for scale. The mantra was simple: bigger is better. However, the industry has matured, and today, we see a significant shift towards acquiring for alignment rather than just size. This change reflects a deeper understanding of what truly drives success in the advisory business.
When considering a merger or acquisition, it’s essential to assess not only the financial metrics but also the cultural and philosophical alignment between firms. As we’ve observed, the most successful partnerships are those where both parties share a common vision and investment philosophy. This alignment is no longer a nice-to-have; it’s a critical factor that can make or break a deal.
In our Global Advisor Study, we explored the reasons advisors might hesitate to move forward with a merger or acquisition. The results were telling. A staggering 79% of respondents indicated that misalignment in investment philosophy would be a deal-breaker. Following closely, 76% cited concerns about whether the deal would be in the best interest of their clients. Only 65% pointed to the terms of the deal as a primary concern.
This data underscores the importance of having a singular, consistent investment philosophy. As David Booth, co-founder of Dimensional Fund Advisors, aptly stated, “The most important thing is to have one investment philosophy.” This philosophy should resonate throughout your firm and be a guiding principle in all client interactions.
As you contemplate a sale or merger, it’s vital to keep your clients at the forefront of your decision-making process. The advisory space is built on trust, and any shift that could potentially impact your clients’ experience must be carefully considered.
When engaging in conversations about M&A, ask yourself: How will this change benefit my clients? Will the new partnership enhance the services we provide? These questions should guide your discussions and decisions. The data shows that advisors are increasingly prioritizing client value over financial terms when evaluating potential deals.
Cultural alignment is another crucial aspect of successful mergers and acquisitions. As you consider potential partners, take the time to evaluate their culture and values. A firm’s culture can significantly impact employee morale, client relationships, and overall business success.
During our discussions, it became evident that firms with a strong, cohesive culture tend to navigate M&A transitions more smoothly. As Ryan Halls pointed out, “Life after the deal matters.” The human element of M&A is paramount; it’s about the people involved and how they fit together. If you focus solely on the economics of the deal, you risk overlooking the critical aspects that contribute to a successful integration.
The client experience, planning, and the overall service offering form the backbone of your advisory firm. Many firms have dedicated teams responsible for delivering the investment philosophy, including research personnel, traders, and Chief Investment Officers. When contemplating a merger, founders often worry about the fate of their team members. Even if the philosophies align, they may fear that existing roles will be redundant.
It's crucial to understand that there is a role for every team member in the new structure. The expertise and relationships your team has cultivated are invaluable and should be leveraged to enhance the client experience. As Ryan emphasized, “Everything that they're doing today that’s valuable to your clients—those people need to continue doing that in the future.” This continuity is essential for maintaining client trust and comfort during the transition.
As you reflect on the possibility of selling your business or merging with another firm, consider the following practical steps:
In our ongoing research and discussions, we’ve encountered some surprising insights. For instance, many clients express uncertainty about what will happen to their assets when they transition them to their heirs. This lack of clarity is more prevalent than one might expect, highlighting the importance of proactive communication with clients about succession planning.
Moreover, we found that a significant number of advisory firms lack clearly defined succession plans. In fact, when we asked how many have a written succession plan—not just a contingency plan—70% of firms did not have a clear strategy in place. This statistic underscores the need for RIA founders to prioritize succession planning and ensure that their clients have confidence in the continuity of service.
As you contemplate the future of your advisory firm, remember that the M&A landscape is evolving. By prioritizing alignment in investment philosophy, focusing on client value, and ensuring cultural fit, you can navigate this transition with confidence.
The journey of selling or merging your business is significant, and it’s essential to approach it thoughtfully. Embrace the opportunity to create a lasting impact, not just for yourself but for your clients and the broader advisory community. With careful consideration and strategic planning, you can pave the way for a successful transition that honors the legacy you’ve built while positioning your firm for future success. Life after the deal matters, and by focusing on the human element, you can create a brighter future for you, your team and your clients.