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Pros and Cons of Purchasing Acquisitions Outside Your Broker Dealer

Advisor interest in acquisitions has grown tremendously over the last few years. Practices of every size have gotten in the game, even if only to make a single acquisition. Advisors new to the acquisition game or contemplating jumping into the acquisition pool are faced with many more options than in previous years. These options have their advantages and drawbacks, especially when looking at purchasing practices outside of your affiliated platform.

Pros of Purchasing Acquisitions Outside Your Broker Dealer

More Practices for Sale

Looking beyond your broker-dealer or custodian for opportunities naturally opens a much bigger market for prospective acquisitions. There are hundreds of thousands of advisors across the U.S., many of whom own their clients. These normally competing advisors can be in your own back yard, which is appealing for advisors looking to deepen market share in a specific region or within a specific niche. 

Better “Fit” Options

Oftentimes the right acquisition from a “fit” standpoint operates under a different platform. Fit means a near perfect alignment between you and the selling advisor’s practice in terms of personality, culture, investment philosophy, target market, or some other critical factor. A better fit practice often results in a smoother transition as both practices already operate in similar fashions or are led by advisors with a similar approach.

No Concerns for Internal Equity Transfer Rules

Outside acquisitions also allow advisors to avoid any equity transfer rules or other restrictions that may come from acquiring a practice under the same broker-dealer. Although broker dealers would prefer that sunsetting practices remain “in-house,” many have taken issue with the growing trend toward mergers and the formation of large, consolidated practices that are leveraging a larger practice’s higher payout rates while staying employed and active as an advisor. As a result, they have started implementing limitations on how those acquisitions are included and calculated for pay-outs and other incentives, at least in the few years immediately following the acquisition.

Broker Dealer Support

Every broker-dealer is looking to grow their market share, and by proxy, revenue to the firm. Outside acquisitions allow the advisor and the firm to capture more clients and more AUM. Because the incentives are strong for the firm itself, many broker dealers have existing programs and/or are willing to provide resources for advisors looking to make outside acquisitions. This can include everything from financial incentives to logistical support with transitioning clients and practice operations into the acquiring practice.

Cons of Purchasing Acquisitions Outside Your Broker Dealer

Finding Acquisitions

Although an open market provides greater opportunity, it can be difficult for advisors to network and mine for deals at a national level. Many practice listing services try to mitigate this issue, but the reality is that many practices for sale are never listed with these services. As a result, advisors looking outside their broker dealer must leverage multiple avenues outside of their BD network to find prospective deals.

Greater Competition

Just as the market for practice sales multiplies when you look outside your broker dealer, so too do the number of competing buyers. Not only are you competing with other broker dealers, but also RIAs and private equity firms. Prospective buyers must do everything they can to position themselves as a worthy successor or partner to gain a competitive edge in the acquisition game.

Challenges of Repapering and Migrating Clients

One of the biggest challenges for outside acquisitions is in transitioning clients over to the acquiring advisor. Not only do assets and accounts need to be transferred, there often is a greater volume and complexity of documentation and data management that needs to happen to migrate clients over. This can become a frustrating experience for clients and may impact client attrition.

Greater Attrition Risk

Repapering and logistical challenges aren’t the only thing that can lead to greater client attrition during an external acquisition. Some clients may have a certain amount of brand loyalty to the previous broker dealer and choose to find another advisor within that network. There may also be a lack of support and/or transparency either from the selling advisor or their broker dealer which can impact communications and logistics that can delay or challenge a transition. It’s not impossible to transition an outside practice, and with proper management it can be done with minimal disruption, but it does require planning and patience to do well.

Purchasing a practice “outside the family” can be an excellent way to grow your practice and gain vital market share in a particular region or niche. As with any business transaction, there are pros and cons that must be weighed and mitigated before proceeding. Having a plan, pulling together a team of experts, and securing financing ahead of time can make any acquisition a success, even one outside your broker dealer.