Buying A Small Wealth Management Firm

Well, if he's the only value-add to the operations, are you sure the investors would stay on boat? A lot of these funds "transition" simply by returning the funds back.

That's certainly a danger we've considered - part of this would clearly involve a transition phase over the course of a year or a few, giving the investors a chance to become comfortable with us. It wouldn't be an outright sale right off the bat.

PWM is very relationship based, I have a hard time believing that you would be able to build trust with your investors whom have been invested for possibly 20/30/40 years with this manager. It might be important that he vouches for you as well as understand who will stay with you when he leaves. Its a 1-man shop, so they are only there because of him (his reputation, past performance, relationship). If you have a bad month/quarter/year, I would imagine you will start bleeding AUM unless he hasn't had great performance and they are simply uninterested, apathetic investors.

Whats the AUM composition look like? Is it a few HNW accounts or a bunch of unaccredited, small accounts?

What kind of investment strategy does he run? Is he more of an asset allocation guy or choosing specific securities for his clients? Understanding the investment strategy and being confident that it is something you can improve/maintain is the only way this will work.

Source: Family member runs a smaller scale (compared to this) RIA.

People aren't very trustworthy when it comes to someone handling their earnings/retirement/inheritance. Tons of examples that illustrate this point like prospie's above. Very curious to hear some of the answers to my questions above, thay would make things a bit easier to give an opinion, but without more info, i'd place a substantial bet that it would be near impossible to retain these clients

The client base is fairly large - meaning most accounts do not have very much invested. I imagine this diversity can only be a good thing given the scenario we are discussing - correct? We are probably talking about 100-150 accounts, varying in size from around 2 mil for one or two, down to 10k for a friend here and there.

Frankly, with the exception of half a dozen or so very involved clients, most of these accounts really aren't touched very often. Some of them are trusts, where the man concerned is one of the trustees, but I would say at least half of the AUM is literally sitting there and the client probably doesn't even open their quarterly report (when this guy has his act together enough to get one out...).

I see this firm as essentially very poorly run, but with a solid history and a decent amount of money currently in it. He is allowed to employ just about any strategy he thinks is best, and often invests in small or micro cap, speculative, companies. He has a tendency for metals/mining, especially gold. Consequently he has done pretty well for himself through the economic downturn since '08, but I'd imagine he hasn't done very well in the last year and a half (I haven't been directly involved in about that long).

With these details can anyone speculate further? I'd love to hear some more opinions on this matter.

A one-man PWM shop = the AUM will go when he does.

It;s honestly hard to tell, but like everyone else has said, the current owner is the value-add as they are solely his relationships and he makes all the decisions. I wouldn't even consider this unless you are 100% sure that the majority of the clients/assets will stay once the change of ownership occur. Even if you can improve operations and marketing, etc etc, the only valuable asset is the client. If they go, its worth 0.

Focus Financial Partners...perhaps they can help?

This kind of small business in which the founder/owner holds all of the relationships (i.e. value) is really tough to think about in an M&A scenario.

My fiance's father has two companies which he would like to sell (and then he would retire). However, I (who am supposed to be an "expert" in M&A) can't figure out why anyone would want to buy the companies if he (my fiance's father) is no longer in the businesses.

Without ongoing, reliable and valuable management in place, a lot of these small businesses are hardly worth much.

Structure the deal as an earn out over a number of years so he has a strong incentive to introduce you and transition the accounts. Make sure he's still there for a year or two while you meet everyone and they can gain comfort with you.

Buying out or transitioning a wealth management practice is a fairly common occurence and I know many who have done this in both the wirehouse and independent B/D channel. As Dickfuld just mentioned (one of the few times we actually agree); the trick here is more in the transition of the practice. Most tranistions I've seen had a buyout where the previous owner gets paid a percentage of the revenue over 3 to 5 years (decllining each year). Obviously in this type of structure both parties have the same goal.....retain the assets and keep the revenue going.

Feel free to PM if you would like to discuss this further.

When first reading your post, iDidn't think you stood much of a chance...but after your description of the company, iFeel that you may. I currently work at a bank as an underwriter for various things. Won't get into details, however one of our area Financial Advisors, his office is right beside mine. We frequently get lunch together and chat about various topics. Similar to what you stated about the prospective company, he does not have many "large" accounts, but 100 or more smaller accounts and then a few with 1mil+. From listening to him and other friends iHave in the advisory business, iBelieve it may be possible for you in this venture. My reason for saying so is he mails letters, gives surveys (required by company), and other forms of contact/evaluation ....no1 replies. Even here, iAsk around the office, to see how much/frequently they contact their FA or fidelity (they have our 401ks) and the response iKeep getting is, " I check the balance of those accounts about once every other month". Now I'm not saying everyone is like that, or that you need to be down your advisors throat every 5 mins, however iWould be willing to bet most of those "small accounts" @ the company your prospecting, are the same way. With that being said, iDo realize that our society as a whole is becoming more "intelligent" (by that iMean they are slowly realizing the importance of things like voting, taxes, education, personal finance etc.) but that doesn't mean people don't still have that "herd" mentality...because they do. People are lazy, and think moving their assets from 1institution to another is a "hassle" and will be hesitatant to do so unless heavily persuaded. iUnderstand this company is a 1-man-show, but if your description of the company is accurate, it may be difficult, but do-able. The smaller/uninvolved accounts should stay/give you a chance, it's the larger ones you may lose.....so just make sure the price you pay reflects that.

-Like they said in previous post, make sure he sticks around for sometime b4 his departure, and introduces and shows full faith/confidence in your abilities to his client base.

P.S. how well and how do you know the guy your buying the company from ?

Thanks for all the input guys - really appreciate the sounding board.

I basically agree with the consensus I'm getting here - may (probably) lose the more active accounts where the investor has a strong relationship with the main guy, but could probably retain a good number of the smaller less active accounts (would still total several 10's of millions).

The idea would definitely be an earn-out for the guy leaving. Frankly I think the way to play it to him is he really has no other succession options. He's well over 80, his kids (and grand-kids) have no interest in running the company, and the reality is he can't do it forever. My idea would be to stroke his ego - tell him he'd always be involved, we'd keep the name (why not - it has a great history of more than 50 successful years, why throw that away?) - and then try to modernize the way he does things. His other option is doing it until he literally can't anymore - then just dissolving the firm. This way at least his legacy would go on (his name is on the door, etc).

Honestly this is very theoretical at the moment (obviously) - but I have a buddy who would be on board to do it with me (he has also worked there and has a good relationship with this guy). It's an opportunity that clearly has a time-limit, but frankly my biggest hold back is I don't particularly love wealth management... It's clearly a huge opportunity to end up with a good amount of money and autonomy to invest at a young age - but do I want to sacrifice the career I'm starting to build in another direction? Tough decision to balance there.

Well iM just very impressed by their dedication