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Critical Transition Lessons For Wealth Managers
14 May 2021
Transitioning to new ownership may seem straightforward at first glance, but the multitude of decisions involved in execution can become overwhelming. The process
Indeed, whether the result of a sale or an internal succession, a transition can be one of the most challenging endeavors a wealth management firm undertakes.
A field report on why three firms decided to transition, what the process was like and lessons they learned along the way were explored in depth at DeVoe & Company’s recent virtual G2 Forum.
With over $2 billion in assets under management, PagnatoKarp, an advisory firm and family office based in suburban Washington, DC, was thriving at the beginning of 2020. But Paul Pagnato, the firm’s founder, knew that his company needed more financing to grow beyond his regional market and invest in much-needed technology.
“To be able to grow to the next level, we needed a lot more capital than leveraging up,” Pagnato said. Debt financing or selling a minority stake of the firm’s equity was not the answer. Instead, Pagnato decided to merge with Cresset, a rapidly expanding Chicago-based RIA that had quickly grown to nearly $10 billion in AuM since being founded only four years ago.
A year after the deal with Cresset was finalized, the transition has “exceeded expectations,” Pagnato said. His tech budget has doubled, his firm is part of a company with offices around the country and Pagnato can draw on ample resources to offer a wide range of services to ultra-high net worth clients.
Kara Duckworth’s RIA also joined a larger firm, but took a different path. She was a principal at Duckworth Wealth Advisors in Newport Beach, California, a firm founded by her father. Although the firm had explored internal succession, in 2017 it decided to sell to Mercer Advisors, an aggregator powered by private equity that now has over $30 billion in AuM.
The RIA’s partners did a lot of “soul searching,” Duckworth recalled. To be able to offer additional services like tax planning and consulting, they realized that they needed a bigger partner. The Duckworth partners then came up with a list of “non-negotiable” business and cultural criteria that Mercer met.
In the end, the deciding factor was that “we just flat out liked the people,” she said. “We knew we would spend a lot of time working with them and that was important.”
In Marin County, California, the partners at Willow Creek Wealth Management decided to stay independent, but they did have to manage an internal succession.
The process began in 2006, when the firm’s founder began selling equity. Kelly Noonan, the firm’s chief operating and financial officer, was one of the initial partners. Using outside consultants for third-party objective advice was critical, Noonan told the G2 conference.
Current stakeholders are “very intentional” about bringing in new partners, she said, and the firm distributes a one-page document, “Path to Partnership,” for potential candidates.
New partner candidates must have a minimum of three years of experience at the firm, a track record of acquiring new client revenue and maintaining an “exceptional” client retention level. Non-wealth advisors have to demonstrate that they have generated “value to the firm through prospective client leads, exceptional service to clients, and strategic relationships within the industry and the community.”
Willow Creek has grown to $1.3 billion in AuM and buy-in can be “daunting” for new partners, Noonan said. But working with Oak Street Funding, which provides a lending solution for new stakeholders, has eased the burden considerably, according to Noonan.
“There’s no such thing as a secret plan ” said Tim Kochis, special advisor to DeVoe & Company, who moderated the panel. Employees need to know what’s going on, Kochis cautioned. They will either be motivated to make the transition or realize that they won’t be a good fit going forward.
Pagnato agreed and said that he insisted on getting input on merging with Cresset from both staff and clients. Once the merger was finalized, Pagnato discussed what employees' roles and responsibilities would be in the combined entity.
Transparency is critical, he maintained. “We wanted to be able to openly discuss career paths, goals necessary to become partner, how people can get more equity and have more responsibility.”
Mercer also made an effort to reach out to Duckworth’s advisors. The company’s chief talent officer talked to Duckworth staffers and asked them “what do you do and do you want to keep doing it?”
Duckworth herself made it clear to Mercer that she wanted a larger role that would focus on women, and is now in charge of client experience for Mercer.
Reassuring clients that the transition will be stable is also key, Kochis said. “Our clients wanted to know if they would still be working with the same advisor and if client events would be the same,” Duckworth said. “We said yes and yes and they were OK after that.”
Pagnato: “Remember that the transition is about progress, not perfection.”
Duckworth: “There will be a period when you will go out of your mind. That’s normal. I call it ‘the swamp of integration.’ You want to get there as fast as possible. Then you just need to keep going.”
Noonan: “I was surprised by the amount of time and effort the transition took. You can’t start too soon.”
Transitioning to new ownership may seem straightforward at first glance, but the multitude of decisions involved in execution can become overwhelming.