When Many Look to Sell, Big Buyers Win

Research from Cerulli Associates finds mega advisory teams—those with more than $500 million in assets—are in a great position to attract new clients through retirement-driven acquisitions of small, independent firms.

“Close to half of independent advisers retiring within the next five years consider transferring clients to the buyer a major concern in succession planning,” says Kenton Shirk, associate director at Cerulli. He predicts mega teams are best equipped to absorb and manage the clients of a retiring adviser.

It’s no big mystery why this is the case, the Cerulli research explains. Beyond having more resources, a wider staff footprint and stronger brand visibility in the marketplace, large advisory teams can likely hire staff solely dedicated to client transition management and compliance assurance. “They also have the infrastructure to assume additional client relationships seamlessly, and they are best enabled to provide a seller’s clients with an ongoing positive experience,” Shirk says.

This serves independent advisers’ feelings of paternalism over their clients long-term outcomes—and due to the elements of fiduciary risk involved, independent advisers themselves tend to feel more comfortable transferring clients to large, proven firms. Reversing a trend that has long worked against mega teams, more megas have in recent years embraced client relationship management technology and other new approaches to high-touch client service, further strengthening their position as an acquirer compared with small, independent shops. 

All in all, the prospects are good for so-called mega teams in the coming years, Cerulli says. “Mega teams already control a disproportionately large percentage of market share.…While only 23% of advisers are affiliated with a mega team, they control more than half (54%) of industry assets.”

NEXT: Another advantage for megas

Highlighting another important detail from the report, Shirk says large teams are most likely to win acquisitions from retiring advisers because they can afford to “maximize earn-outs for a seller.” This is partly due to the size of mega firms and their simple ability to cut a bigger check on shorter notice than smaller competitors, but it’s also due to mega teams’ longer-term business outlook that is not necessarily tied to the career path of a given individual owner.

When this is the case a mega team can take a much more strategic view of making acquisitions and bringing in new clients. For example, a mega team with a strong succession plan in place will be able to target younger, small-balance clients (i.e., cheaper clients to acquire) than another independent advisory firm owner looking to wind down his own business in the next couple years. The mega team, in this example, has much more leeway to think like a corporation and maximize acquisition value and efficiency—for example by factoring in elements such as future client growth—while the smaller advisory team will be limited by its ownership's personal needs.

Further, as broker/dealers and asset custodians consider the risks of mass adviser retirements and successions for their own business interests, Shirk predicts many will move to finance internal acquisitions via adviser intermediaries. “In doing so, they are most likely to provide resources to those practices best equipped to handle these transitions,” Shirk concludes. “This is yet another factor that could lead to increasing asset control for the industry's largest advisory teams.”

These findings and others are presented in Cerulli’s first quarter 2016 issue of “The Cerulli Edge – Advisor Edition.” Info on obtaining Cerulli  research is here.