What to Do if Your Financial Adviser's Firm Gets Acquired

A financial adviser answers an older couple's questions at a conference room table.

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It's a hot time for mergers and acquisitions among wealth management firms. There is a seemingly never-ending supply of private equity money chasing too few firms, creating wild valuations and the ultimate seller's market for firm owners.

The question is: When you get the email or call presenting the "great news" that you're now going to be a client of 123 Wealth Management, what will it mean for you?

I was an owner of a firm that sold to a mega-RIA (registered investment adviser). I now own a much smaller firm, and I am registered with a different mega-RIA. I hope I can offer a unique perspective after seeing deals from different seats.

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Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Here are four questions you can ask your adviser to try to figure out if you should sign that new paperwork and stay with the acquiring firm.

1. How will the people change?

Yes, the people acquiring the firm are important, but more importantly, this is a relationship business, and you want to make sure that your relationships from the previous firm aren't changing.

This all assumes that you actually like your adviser. If you don't like your adviser, think of this as catching your spouse cheating when you already wanted a divorce. It's a good forcing mechanism.

In most deals, the acquirer will pay a retention bonus to employees who stay for a certain period of time. For firm owners, an earnout clause is common, requiring them to stick around and try to grow revenue for some period of years in order to get a second payout on the firm sale.

The main question is what are they going to do after that period?

Now, I want to be careful not to paint selling a firm as an unreasonable thing to do. If you work directly with the founder or another owner, this is very likely their succession and retirement plan. None of us will be around forever. The question then becomes: Who is succeeding them? Do you like and have faith in the person?

2. How did you pick the buyer?

There are several factors for a seller to consider besides the obvious one: price. The firm owner who is selling will want to make sure that it's a good cultural fit for their employees, that the business models are similar, that the offering for current and future clients is attractive, that investment philosophies are aligned, etc.

As mentioned earlier, there is a lot of private equity money in this space. That used to carry a negative connotation, but at this point, if you're selling a large firm, it's almost unavoidable to have private equity money in there somewhere.

What you, as a client, want to be cautious about is the firm that sells to the highest bidder, regardless of the other factors listed above.

Private equity funds have different methods of making money, but the biggest and most obvious is to buy a business for $1 and sell it for $2. The bigger the business they can put together via acquisitions, the higher the multiple they are likely to get when they sell it.

For this reason, many PE-backed firms that are thinking about the back-end sale will overpay for the business.

What this could mean for you is a lot of change in terms of personnel in the short term and another ultimate owner in the medium term.

More than likely, you just want someone to help make sure you can do the things you want with your money without having to worry about running out. It would be preferable if you could get that without all the firm drama.

On the flip side, probably one of the greatest benefits of folding into a larger firm is expansion of services.

This would be an ideal answer to the question: They allowed us to provide all the services you had before, using the same systems, but now we can do your taxes, help prepare your estate plan and help you exit that concentrated stock position.

That was very specific, but the focus is on the benefit to you, not the selling firm.

3. Will the fees change in the short term or the long term?

Fees almost never change immediately. However, over time, the acquirer will want you to be on the same fee schedule as the rest of the new firm's clients.

This could be a pro or a con. If the new firm has lower fees, that's a win. If the fees are higher, you must weigh if that new cost is worth it to you.

4. What will happen to my investments?

One of the reasons buying wealth management firms is attractive for private equity is that many of the operations can be streamlined. Investments fall into that category. You can serve 10 times as many clients without 10 times as many CFAs.

Where this becomes an issue for you, the client, is if it forces you to move from the old firm's strategies to the new firm's strategies. Even if there is a solid argument to do it, the secular bull market we have been in since the global financial crisis likely means it will come with a big tax bill.

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Capital gains and cost basis are tracked by the custodian but can sometimes be difficult to figure out. If you're wondering what your unrealized gains are, which would determine your tax bill if sold, you can use a free version of our planning software. When you link the accounts, it will pull over cost basis data.

When I started my firm, I had to pay for custom models that allow me to mitigate this issue for my clients. An option like this may be on the table. But it also may not be.

5. If your spouse asked you what the biggest cons of the sale are for your clients, what would you say?

A few years back, I was helping a client navigate a life transition and she asked me, "If I were your mom, what would you tell me to do?"

What a great question that was! It made me pause for a moment to ensure that it would be, in fact, the same advice I was offering her.

Your family, whether it be your spouse, your kids or your parents, is going to see this deal from the inside. If they asked you about the downside for clients, what would you tell them? This is meant to be a catch-all for anything you didn't ask about.

The reality is that acquisitions are necessary in our world to facilitate adviser succession. I have seen many turn out great for clients. I have also had many clients who come to my firm because "it's just not the same."

I hope this column helps you avoid any unpleasant surprises.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.