In Practice January 19, 2016

When Many Look to Sell, Big Buyers Win

Many independent advisory shop owners hope to retire by the early 2020s, spelling serious opportunity for large advisory networks with the resources and vision to make selective acquisitions. 
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Research from Cerulli Associates finds mega advisory teams—those with more than $500 million in assets—are in a great position to attract new clients through retirement-driven acquisitions of small, independent firms.

“Close to half of independent advisers retiring within the next five years consider transferring clients to the buyer a major concern in succession planning,” says Kenton Shirk, associate director at Cerulli. He predicts mega teams are best equipped to absorb and manage the clients of a retiring adviser.

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It’s no big mystery why this is the case, the Cerulli research explains. Beyond having more resources, a wider staff footprint and stronger brand visibility in the marketplace, large advisory teams can likely hire staff solely dedicated to client transition management and compliance assurance. “They also have the infrastructure to assume additional client relationships seamlessly, and they are best enabled to provide a seller’s clients with an ongoing positive experience,” Shirk says.

This serves independent advisers’ feelings of paternalism over their clients long-term outcomes—and due to the elements of fiduciary risk involved, independent advisers themselves tend to feel more comfortable transferring clients to large, proven firms. Reversing a trend that has long worked against mega teams, more megas have in recent years embraced client relationship management technology and other new approaches to high-touch client service, further strengthening their position as an acquirer compared with small, independent shops. 

All in all, the prospects are good for so-called mega teams in the coming years, Cerulli says. “Mega teams already control a disproportionately large percentage of market share.…While only 23% of advisers are affiliated with a mega team, they control more than half (54%) of industry assets.”

NEXT: Another advantage for megas

Highlighting another important detail from the report, Shirk says large teams are most likely to win acquisitions from retiring advisers because they can afford to “maximize earn-outs for a seller.” This is partly due to the size of mega firms and their simple ability to cut a bigger check on shorter notice than smaller competitors, but it’s also due to mega teams’ longer-term business outlook that is not necessarily tied to the career path of a given individual owner.

When this is the case a mega team can take a much more strategic view of making acquisitions and bringing in new clients. For example, a mega team with a strong succession plan in place will be able to target younger, small-balance clients (i.e., cheaper clients to acquire) than another independent advisory firm owner looking to wind down his own business in the next couple years. The mega team, in this example, has much more leeway to think like a corporation and maximize acquisition value and efficiency—for example by factoring in elements such as future client growth—while the smaller advisory team will be limited by its ownership's personal needs.

Further, as broker/dealers and asset custodians consider the risks of mass adviser retirements and successions for their own business interests, Shirk predicts many will move to finance internal acquisitions via adviser intermediaries. “In doing so, they are most likely to provide resources to those practices best equipped to handle these transitions,” Shirk concludes. “This is yet another factor that could lead to increasing asset control for the industry's largest advisory teams.”

These findings and others are presented in Cerulli’s first quarter 2016 issue of “The Cerulli Edge – Advisor Edition.” Info on obtaining Cerulli  research is here. 

Client Service January 15, 2016

Addressing the High Cost of Maintaining a DB Plan

DB plan sponsors are freezing their plans and changing accounting methods; what can be done about ballooning costs for these plans?
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Ford Motor Co. recently announced that its change to mark-to-market accounting for its defined benefit (DB) plan will add $1.5 billion to its earnings, and Baystate Health announced that freezing its pension plan provided $69.7 million in revenue, preventing it from recording an operating loss.

These are not new trends. Other DB plan sponsors have switched accounting m,ethods, and reports of pension freezes have become common in the last 10 years.

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Alexa Nerdrum, a senior retirement consultant in Willis Towers Watson’s Southfield, Michigan office, says the move to mark-to-market accounting means pension gains or losses are recognized immediately rather than amortized over several years. By adopting that accounting method, plan sponsors move prior year losses from current results. She tells PLANADVISER this is a more true measure of a DB plan sponsor’s financials. Removing amortization removes long-term market fluctuations and when DB plan sponsors use this accounting to project into the future, it improves their ability to budget for the plan, she adds.

Other than for financial reasons, Nerdrum says Will Towers Watson has seen clients move to mark-to-market accounting to align with international accounting standards or to align their measures with their competitors’.

Freezing a pension plan can help plan sponsor company’s financials by removing the liability of future benefits yet to be earned off the balance sheet, which is required to be reported under current rules, Nerdrum explains.

NEXT: Why have pension plans become so costly?

Nerdrum notes that when the Employee Retirement Income Security Act (ERISA) was passed, there were different ways required contributions for DB plans were calculated and liabilities recorded than now. “Accounting rules have changed, and some of operational costs have skyrocketed,” she says, noting that Pension Benefit Guarantee Corporation (PBGC) premiums have “increased exponentially” over the last decade.

Legislative rules for valuing the cost of DB plans have changed as have funding rules; in the past employers could take a contribution holiday, which may have led to lower funding in subsequent years, according to Nerdrum. She adds that market uncertainty also drives increased costs for DB plans.

Nerdrum admits that DB plans are complex and require sound governance as it relates to managing the cost, but Willis Towers Watson sees many employers still committed to maintaining active DB plans. “We’ve done research and found 20% of Fortune 500 companies still offer a DB plan to new employees, and 29% of Fortune 100 companies do. They believe in [DB plans’] value,” she says.

DB plan sponsors can manage the cost of their plans with sound governance and funding and investment policies, Nerdrum asserts. And, they need to understand risk and establish an investing policy that will consider the lifetime of the plan.

DB plan sponsors can also take advantage of opportunities to change to a less costly plan design, and they can get rid of some of their liability by transferring some to an insurance company or offering a lump-sum window to certain participants.

“There is constant discussion in the industry and Congress about how to make these plans more sustainable, and I think those discussions will continue. The industry and Congress wants to see reform,” Nerdrum concludes.

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