As a consultant who helps wire house and independent advisers I’m almost always amazed at the lack of an inorganic marketing plans in the organizations or teams they own. It’s surprising because of how prime the market is for inorganic growth, and because of how big the impact can’t be in net income from completing just one transaction.
Let’s start by defining inorganic growth. Inorganic growth is growth that does not come from direct client marketing activities. It is growth in clients and revenue that come from a transaction or merger where the firm ends up managing far more revenue. The most obvious example is one firm buying another or M&A.
Last year in 2016, according to Devoe and Company, there were 142 transactions in the independent space and many times that from retiring advisors in the wire-house space who retired for a compensation package and turned over their life’s work.
There are many benefits of M&A including:
1. You can add three to five years’ worth of revenue in one transaction.
2. You can add key managers and partners — people you need to maximize value.
3. You can expand geographically.
4. You can eliminate duplicative costs.
5. You can achieve critical mass faster.
To make the point even more clear let’s assume we have two financial advisory firms. Both have revenue of $1 million and both spend half that revenue on costs such as people to service clients, software, rent etc. When an M&A transaction comes along and puts these firms together many of the costs are eliminated, and many costs are reduced because they are priced based on size. Our experience is you should be able to eliminate 70-80% of the acquired costs unless the two businesses are very different. That would mean new net income to the acquiring firm of around $400,000. Since their net BEFORE was $500,000 that is an 80% increase in profits with this one transaction. While this is only for illustration, I think you can understand the opportunity.
So why don’t more advisors pursue inorganic growth. in 2015 89% of the transactions were done by firms who had already completed one or more transactions. Clearly this is saying that experience in this M&A game is important. Firms who are serious about this get that experience by hiring consultants for a while until they learn the M&A business who help them jump start their inorganic growth.
Why is this so important now? In 2014, Cerulli reported that the average age of an adviser is 50.9 years old. Over the next ten years some of the best opportunities to harness in organic growth will appear and also go away. The question is will you be a part of it?
The opinions expressed are those of the Author and not Private Wealth.