Did the DOL Create a Buyer’s Market for Advisory Firms?
Every year after tax season, ‘for sale’ signs go up at CPA firms across the country. It’s no wonder.
It’s a grueling business that forces accountants to run a marathon-length sprint at tax time to accommodate their clients, most of whom file on April 15. Once it’s over, it’s not uncommon for CPAs who are near retirement age (or even younger!) to call it quits. The result can be a buyer’s market for anyone looking to buy an established firm.
If you’re a financial advisor looking to expand your practice, you know all too well that the process of buying (or selling) another practice hasn’t been so simple in our own industry. That may be because maintaining a book of business is often not as difficult as building it in the first place. Many older advisors therefore can keep their doors open longer and, in some cases, simply lighten the load over time to create a “lifestyle practice.” That allows the advisor to delay retirement indefinitely, and it keeps their clients happy as well. This reality has made it a challenge for advisors who want to expand their own practices by purchasing another firm. Companies like FP Transitions and Succession Link who specialize in bringing the buyers and sellers of advisory firms have reported that for every seller on their sites, they have between 30 and 50 potential buyers. That’s a lot of competition!
The good news: the game may have shifted entirely with the announcement of the final DOL fiduciary rule. By April 2017, advisors must comply with the new rule that includes changes to producer compensation, products, and compliance. Advisors who operate commission-based practices are facing a transition—and for those one-third of advisors who are nearing retirement, it just may not be worth the trouble.
That’s great news if you’ve been thinking about expanding your own practice. Thanks to the DOL, the number of ‘for sale’ signs on advisory practices is likely to escalate in the next 12 months, and for the first time in ages, there may be more sellers than buyers. If you’re ready to consider the opportunity, here are five things to keep in mind:
1. Choose a firm with similar values.
Taking on a practice is a complex, “Brady Bunch” challenge. Take the time to be sure your philosophy and culture are aligned. If your focus is financial planning, an investment-focused firm won’t be a natural fit. The same is true for active versus passive investment styles. From a team perspective, synergy with your own team will go a long way to reduce integration pains. The same goes for the clients. Some advisor’s clients might be used to “kitchen table” meetings versus having to come to your office, some may prefer a more formal setting, and some may prefer a more “robo” approach. Think through which differences you can live with—and which you can’t (or shouldn’t).
2. Consider technology.
Technology is another challenge. Whether it’s a CRM system, the clearing firm used or other key systems, evaluating and understanding your target’s technology platform is a key consideration. This is especially true now that “robo” strategies are becoming more important to growing practices. Of course, if you’ve found the perfect firm, their technology platform (or lack thereof) needn’t be a deal breaker, but it will need to be addressed—particularly if your technology platform is not completely defined and built.
3. Consider transitioning new clients to fee-only.
Since you’re going to have to initiate contracts with each new client at the time of the business transition, you may want to introduce a fee-only structure from day one. Discuss why a fee-only agreement may be best for the client, and clearly lay out how much they’ll be charged each quarter and what they receive in return.
4. Make client retention your #1 priority.
No book of business is worth the price if you don’t retain the clients within it. Work with the seller to create a strong client communication plan with his or her client base. Get introduced personally when you can to be sure the transition is relationship based, not paper based. To incent the selling advisor’s involvement, consider structuring the selling price on a percentage of retained clients or assets under management measured at specific time frames in the future.
5. Don’t rush the transition.
Even if the seller is ready to call it quits yesterday, a smooth transition is vital to client retention. Many sellers are willing to work together with a buyer for a period of time to assist with the details of account transfers and to hold their clients’ hands through the change. In this relationship-based business, a smooth, careful transition can be the difference between simply taking on more work and achieving your long-term plans for your growing practice.
Keeping these five things at the top of your mind and setting up conscious processes around them will help maximize the opportunity of buying another advisor’s business. I can’t say that the post-DOL environment will increase advisory practices up for sale in a similar way that CPA practices are for sale after April 15, but being prepared for the opportunity will give you the best chance for success.
What's an Investor to Do When History Doesn't Repeat Itself?
We’re in an era of extremes. It seems a day doesn’t go by without the word “historical” popping up in the financial news.
The equities market and consumer debt are at historical highs. Interest rates and high-yield credit spreads are at historical lows. We haven’t seen even a 5% pull-back in the market this year—for the first time since 1995—and the DJIA is exhibiting its narrowest trading range in history. These are indeed historical times. And whether this fact has you filled with extreme optimism or extreme pessimism, you have some important decisions to make going forward.
There are theories about how we landed in this particular era of extremes, and most are rooted in the significant changes that have impacted both how we live and how we invest. At the top of the list are globalization, automation, and the largest aging population in history (yet another “historical” to add to the list). It’s said that the most dangerous words in investing are, “it’s different this time,” yet one has to wonder if, in fact, it really is different this time. Not just because of the historical market highs. After all, there always has been and always will be a new market high waiting around the corner. What’s different today is the sheer number and confluence of these extreme highs and lows—and their duration. It’s a situation no investor has experienced before, which can make these waters feel pretty daunting. History repeats itself, and investment strategies are largely built on that conviction. But what do we do when it doesn’t? When history fails to repeat itself, how can investors plan for tomorrow with confidence that they are positioned to protect their assets and gain a reasonable level of yield?
The first step is to recognize that, at least in many ways, the investment landscape really is different this time around. All you have to do is look at the numbers to be sure of that fact. And the catalysts I mentioned before—globalization, automation, and the aging population—aren’t going anywhere. If anything, the impact of each will only grow as time moves on. What that means is that there’s no way to predict what’s coming next. The only thing we know for certain is that predictability is a thing of the past (if it ever really existed at all). The result: you need to approach your portfolio differently than you ever have before.
Your goal, of course, is to find return given a risk tolerance. Current yield is an important part of total return and getting it is an elusive proposition in today’s market. If, like many people, you’re less than confident that the four major sectors that currently drive the equities market—healthcare, discretionary, tech, and financial—are poised to continue to rise at even close to recent rates, it may be wise to seek out alternatives to help drive yield without adding more risk to the equation.
But if alternatives are the wise path forward, which alternatives are the best options?
Real Estate Investment Trusts (REITs), Business Development Companies (BDCs), and energy stocks, traditionally the favored “non-correlated alternatives,” defied expectations when the stock market crashed in 2008, inconveniently revealing high correlations just as the equities market began its freefall. Anyone who was invested in these alternatives at the time knows all too well the devastating impact “non-correlated investments” can have on a portfolio, especially when they fail to do their job when it matters most.
Luckily, there is one alternative that can be counted on to remain uncorrelated to the traditional financial markets and, ultimately, deliver that precious yield: life insurance-based investments. And because this asset is literally built on one of the irreversible catalysts of change, the aging Baby Boomer population, owning life insurance may in fact be the ideal alternative to help investors generate non-correlated returns, regardless of where the market turns next. Even better, these investments typically deliver those returns with very low volatility.
What makes life insurance different is that, unlike typical alternative vehicles, secondary life insurance returns aren’t based on the economy. Instead, they are inherently non-correlated because returns are based solely on the longevity of the individual insureds.
As much as we would all love for the bull market to continue on its merry way, one thing history does tell us even today is that a bear market will come. It’s only a matter of when. As you strive to hedge your portfolios and prepare for the inevitable, life insurance-based investments are one tool that can help you achieve the three things you need most: diversification, low volatility, and yield.
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