The Secrets of Firms with Over $1B in AUM

A white paper details how successful retirement advisers can take steps to push their practice to the next level—over $1 billion in assets under management.

How to reach and surpass $1 billion in assets under management is the focus of the latest white paper from the Alliance for RIAs (aRIA). The white paper, “6×6 = $1 Billion: Six RIAs Share Six Secrets to Achieve Scale,” identifies six challenges of practice management and specific ways the most successful aRIA member firms addressed them.

In 2009, there were 300 independent advisory firms with $1 billion AUM, according to aRIA. Today, the number is over 700 and seems to be growing at an accelerating rate. However, independent firms that have been successful may face new pressure from large firms with sophisticated capabilities. Advisers are challenged to either invest in their business, accept the status quo with the potential to be marginalized by larger players, or seek alternatives to their current state, including joining forces with other advisory firms.

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The necessary evolution of the owner’s role in the firm is one key, according to the paper. Brent Brodeski, CEO of Savant Capital, examines an owner’s stages from player, to player/coach, to coach, to professional manager and finally to strategic owner.

This evolution is critical in becoming a billion-dollar firm, Brodeski says, and founding owners will first need to be willing to take on these stages. Next, they will need to determine if they’re capable of follow-through on the new roles. Some may find they’re not willing or able to. If not, they will need to seek outside talent to fill the roles, he says.

Brodeski draws on his own experiences. With an extensive background in financial services, he has experience shifting from an adviser to a strategic leader of a more formal company. Savant employs more than 100 advisers and staff members, and has multiple business lines.

Brodeski continues to work personally with a few clients, but the majority of his time is spent overseeing business management and realizing the firm’s strategic vision, which includes strategic planning, formulating a shared vision for the firm, acquisitions, high-level recruiting, serving as a firm spokesman and client experience.

The Right Fit

What is the right ownership structure for the firm? Ron Carson, CEO of Carson Wealth Management Group, finds a striking commonality among the aRIA firms: “They all have built ownership structures that have not only helped them achieve their growth objectives, but they have set their firms up for even more meaningful growth in the future,” he says.

The paper outlines nine best practices for expanding equity ownership within a firm, such as linking the owner’s equity plan to the firm’s strategic plan. “Without a strategic plan as a guiding tenant, an equity plan will not meet any objective other than diluting the founders’ ownership,” the paper warns.

Another recommendation is that an equity plan should be closely tied to firm-wide compensation systems. “This is especially true for advisory professionals who attract and retain revenue for a firm,” aRIA says. Equity grants should always be accretive to the founding members. Consider linking grants to growth goals and vesting schedules.

Designing growth-oriented compensation plans, investing in organizational talent and becoming a superior financial manager are also addressed. A top-10 list highlights best-in-class traits and abilities that advisers must master to achieve the correct growth trajectory, such as growth rates of at least 15% in year-over-year revenue; a clear and recognizable value proposition; and commitment to continuous improvement of the client experience and outcomes for clients.

The paper is a blueprint for getting to and growing beyond the billion-dollar plateau, according to John Furey, principal at Advisor Growth Strategies LLC and managing member of aRIA. He says the white paper drills more deeply than any previous paper aRIA has released. Furey cites the checklists, best practices lists and real-world examples as essential for anyone interested in expanding an independent advisory firm.

aRIA is a study and research group that comprises six RIA firms that collectively manage more than $20 billion in client assets.

The white paper, “6x6 = $1 Billion: Six RIAs Share Six Secrets to Achieve Scale,” is available free of charge via the aRIA website.

Retirement Plans Need to Be Considered in M&As

All too often, a firm conducting a merger or acquisition (M&A) fails to weigh the options for each organization’s retirement plan.

Human resources, the chief financial officer and a Employee Retirement Income Security Act (ERISA) attorney need to assess the costs and benefits of the respective retirement plans of both the buyer and the seller to determine if the plans should remain separate, be combined or if one of the plans should be terminated. Failure to do so until after the M&A deal closes results in very few options, and typically forces the seller to foot the bill for both plans.

That was the overriding message of a webinar titled “The Impact of Mergers and Acquisitions on Retirement Plans” hosted by AHA Solutions, a subsidiary of the American Hospital Association, and sponsored by Transamerica Retirement Solutions. The webinar highlighted the results of a recent, 90-question survey of 104 hospital administrators conducted by Transamerica.

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Mergers and acquisitions in the health care market are quite frequent, according to the survey; nearly one in four (37%) respondents said their organization had undergone a merger or acquisition. And 42% of the retirement plans in an acquired organization are served by a retirement plan adviser, the survey found.

When conducting an M&A, it is “critical that the impact to the employee program is understood so that unanticipated costs, and administrative and legislative complexities are understood,” said Lynette Jeffrey, vice president of client compliance and consulting at Transamerica.

There are three primary types of business transactions resulting from M&As, Jeffrey said. “The first is a stock sale, where the buyer acquires the seller,” she said. “Generally, the acquired company will cease to exist. In this case, there are four options: maintain the seller’s plan, merge the buyer’s and seller’s plans, terminate the seller’s plan or freeze the seller’s plan.”

The second type of M&A is as asset sale, whereby “the seller will continue to exist as a separate entity,” Jeffrey said. In this case, “the buyer is not responsible for the seller’s retirement plan.” However, if they are interested in consolidating benefits, that can be negotiated, she said.

The third type of M&A transaction is a “disposition or spin-off.” In this case, the retirement plan covering the people in the portion of the business being sold is transferred to the buyer, who has the option of leaving it as a standalone plan or merging it into its own retirement plan, she said.

Only “like” plans can be merged or consolidated, Jeffrey said. In addition, it is important to note that non-for-profit entities can sponsor both 403(b) and 401(k) plans, but for-profit entities cannot sponsor 403(b) or 457 plans, Jeffrey said. As well, non-ERISA plans can be converted to ERISA plans, but the reverse is not true: generally, ERISA plans cannot be converted to non-ERISA plans.

In the event of a merger, retirement professionals, consultants and advisers have an excellent opportunity to help the buyer assess and compare its retirement plan with that of the seller, and can do so by signing a confidentiality agreement, Jeffrey noted. “Mergers are complex, and as there are many moving pieces, you need the expertise of people with diverse backgrounds,” she said.

The adviser must be sure to “understand the nature of the transaction and the potential impact to the organization’s overall structure.” Next, they must “request copies of plan-related documents—that means all plan documents and amendments, the trust document, the loan policy document, all determination or opinion letters, the required legal notices that have been distributed, administrative manuals, 5500 testing results, service agreements and contracts, inquiries from the IRS or DOL, and current employer-level reports detailing the assets of the plan.”

The adviser must then do a thorough due-diligence compliance review of both plans. “Such discipline will enable you to gain insights into costs, and prevent the tainting of plan assets or taxable distribution of plan assets,” she said.

“Next, it is important to determine the transition period, to look at similarities and differences in the plans, to identify which benefits must be protected,” and in the event of any change, “to request projections to determine cost impacts and nondiscrimination testing for the plan sponsor,” she said.

“Review investment contracts as well,” Jeffrey continued. “Identify contract terms and surrender penalties, provider and investment fees. Are there investments suitable for holding as retirement assets? Do they comply with IRS regulations? How much notice is needed for termination, and must it be in writing?”

Undoubtedly, the two plans will have different recordkeepers, so advisers need to help the sponsors of the plans select the recordkeeper with the most robust services and lowest fees, Jeffrey noted. “Advisers can help with these decisions to ensure the chosen solution is the best fit for participants,” she said.

If a change is being made, “legal notices must be distributed in a timely manner to participants,” she said. “If there is a blackout period greater than three days, the employer must send out a notice.”

Lastly—and most important, from the participants’ point of view—individual balances being transferred to a new plan must be equivalent to the fair market value of the previous plan. Once participants learn of a merger and process that information, they will have questions about their retirement plan and the impact to them, Jeffrey said.

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