NFP Advisor Services, which provides technology, service and asset management platforms to financial advisors, including RIAs and hybrids, and is a business segment of NFP, has published the results of a study that reveals what separates an alpha acquisition from non-alpha and near-alpha acquisitions.
The results of the study, titled "Alpha Acquisitions: Maximizing the Return on your Practice Investment," suggest a set of best practices by following the actions of the 25 percent of advisors surveyed who achieved alpha acquisitions.
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"An aging advisor population means many mergers and acquisitions can be expected in the advisor space. In order for these acquisitions to be successful, a diligent implementation of best practices is required," said James Poer, President of NFP Advisor Services. "By taking control of the process, buyers improve their chances for an alpha acquisition and their clients experience smoother transitions."
The study, published by NFP Advisor Services and produced by leading independent research firm Aite Group, found that identifying a suitable practice, client retention and agreeing on practice valuation are among the most common challenges faced by advisors.
After reviewing and analyzing the findings, NFP Advisor Services offers several steps that financial advisors should take to overcome these challenges and produce an alpha acquisition:
- Take your time to find the right match: Of advisors who have achieved an alpha acquisition, 32 percent looked for a target for three or more years, compared with 13 percent and 20 percent of advisors who made near-alpha and non-alpha acquisitions, respectively. Seventy percent of non-alpha acquirers searched for an acquisition for two years or less.
- Use a holistic, realistic valuation approach: The valuation process is seen as somewhat or very difficult across the board. Alpha acquisitions cost an average revenue multiple of 1.55x, compared to 1.34x and 1.27x for near-alpha and non-alpha acquisitions, respectively. Alpha acquisitions favor assets under management, client service model, revenue mix, business longevity and cash flow over other valuation metrics.
- Manage the transition for success: The study found that the most successful acquisitions required one year or less for the transition period. Nearly 50 percent of alpha acquisitions conducted one or several meetings with clients to brief them on the change and transition. In 52 percent of alpha acquisitions, the previous owner left the practice in one year or less. However, it’s important to consider retaining staff; in fact, 57 percent of alpha acquisitions retained all staff members versus only 19 percent of non-alpha acquisitions.
"The study confirms that advisors can achieve successful acquisitions, but a carefully planned approach is needed. Often, a seasoned professional with experience — such as your broker/dealer — can help navigate the many challenges that face buyers and sellers," added Poer.
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By GlobalDataThe analysis in the study leverages an online May 2014 Aite Group survey of 401 financial advisors, of which 100 financial advisors have made a practice acquisition.
