In the high-stakes arena of wealth management mergers and acquisitions (M&A), financial auctions have become a go-to strategy for identifying potential buyers and striking deals. But is this method truly the best fit for the wealth management sector?
Traditionally, financial auctions have been seen as a way to maximize the initial value of an asset, playing on human emotions and biases. Yet, when we consider the unique nature of M&A transactions in this industry, one must wonder: Is an auction-centric approach really suitable? Does it account for the nuanced dynamics and long-term relationships that define successful wealth management mergers?
Perhaps it’s time to rethink the auction model in favor of a more tailored approach.
Auction mechanics
When an advisor decides to sell their firm, the process typically involves a third-party advisor who collects and organizes essential data, including profit and loss statements, organizational structure and client segmentation. This information is used to create a confidential information memorandum (CIM deck) which will be sent to dozens of potential buyers, with limited inference to the cultural fit between the parties. Interested buyers sign confidentiality agreements and submit initial offers. Certain buyers are kept in the process, while others are eliminated based on the economics of their offer(s). This cycle continues through several rounds until a final buyer is selected. Therefore, the buyer identification and matching process is almost entirely math-oriented. The screen for who makes the final round is essentially their economic offer.
This method might work if you were selling a car or real estate, where there are no post-transaction implications for the seller. But it falls flat when selling a wealth management firm, where the seller, employees, and clients are joining the buyer post-acquisition. Selling a wealth management firm is more like getting married — you’re not just offloading an asset; you’re entering a partnership that impacts everyone involved.
The psychology of ‘auction fever’
The science behind auction psychology is well known. Auctions exploit several human emotions and biases in an attempt to extract maximum value. Those factors include:
- Scarcity: The fear that the opportunity will disappear.
- Social Proof: The belief that if others are bidding, the asset must be valuable.
- Time Pressure: The fear that one must act quickly to avoid missing out.
These psychological triggers can induce ‘auction fever,’ where emotion transcends rational judgment. Instead of prioritizing conviction in the fit, the financially driven auction relies on irrational behavior to drive up valuations. This can naturally lead to suboptimal outcomes for both buyers and sellers.
A cultural conundrum
My question for anyone seeking a partnership is straightforward: Is this really how you want to choose your permanent partner? Are you willing to eliminate potential buyers solely based on their initial offer?
Most wealth management firm owners would agree that sacrificing your team and clients for a slightly higher upfront payment is not a wise long-term strategy. So why do so many rely on this process to find a partner?
Instead of lowering your valuation expectations, consider this: A buyer who deeply values cultural fit is likely to offer more. When a buyer is genuinely aligned with your culture, they’re more inclined to pay a premium for the opportunity. Better fit drives a better economic outcome for the sellers.
An alternative path
Instead of an auction, a more appropriate screening mechanism would use objective, measurable points of alignment to decide which prospective buyers get invited to the table. Instead of sending mass emails to dozens of unknown buyers, invite only those with a high degree of alignment.
After this initial step, conduct a transparent competition where buyers know who else is involved. This way, you engage only with potential partners who share your values, structural needs and partnership preferences. Essentially, the buyer list should include only firms that match your business realities and desired outcomes from the start.
By focusing only on aligned firms, you can concentrate on culture, which requires time to properly vet. Achieving this ‘cultural competition’ necessitates detailed knowledge of buyer models, not just their economic profiles.
Knowing the buyers
To effectively conduct a competitive assessment of buyer culture, you need to know the buyers’:
- History
- Organizational structure
- Mandatory points of alignment
- Autonomy profile
- Growth profile
- Client experience
- Investment platform
- Tech stack
- Expansion of service capabilities
- Organic growth capabilities
- Practice management expertise
- G2 training and mentorship capabilities
- Equity story
Armed with this intel, the seller can quickly identify the best candidates to acquire their firm. Instead of simply jumping at the highest initial offer and ignoring cultural fit, this approach redefines the best deal as a blend of cultural alignment, financial package and post-acquisition quality of life.
Here’s the catch: Most advisors running financial auctions lack deep buyer knowledge. Sure, they might understand general buyer economics and structure from past interactions, but they often haven’t taken the time to truly understand the buyers. Honestly, many bankers and M&A advisors couldn’t care less. So, they rely on the same old wide-net, blind auction process. The irony is that in addition to the landmines auctions present for sellers, the buyers loathe the auction process in its present form. They are tired of advisors who have no concern or interest in the post-acquisition success of the deal, who prevent interaction between the parties, and who present financials that have been altered beyond sanity.
There’s zero evidence that financial auctions lead to higher initial valuations of wealth management sellers. Common sense, however, suggests that a buyer confident in a good fit will make a premium offer. By ditching the auction method in favor of a targeted approach backed by robust buyer model data, we can streamline the process and focus on what truly matters: culture. After all, in the world of wealth management M&A, genuine conviction between parties should trump auction fever every time.
Allen Darby is the chief executive officer of Alaris Acquisitions, an M&A advisor to wealth management companies. Prior to launching Alaris in 2019, Darby spent more than seven years leading the outbound M&A activities for serial RIA acquirer United Capital Financial Advisers. As a buy-side advisor for United Capital, he led a team that sourced more than 25 acquisitions, culminating in United’s sale to Goldman Sachs.
https://citywire.com/ria/news/opinion-financial-auctions-arent-suitable-for-ria-m-and-a/a2446428
