Nikolee Turner: Mastering the Three-Phase Framework for M&A Success

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What does it take to execute a successful M&A deal and avoid buyer's or seller's remorse? Hi everyone, I'm business coach Steve Sandusky for Barron's Advisor, The Way Forward Podcast. My guest today is Nicoli Turner. Nicoli leads the business consulting team at Schwab Advisor Services. In today's conversation, Nicoli breaks down Schwab's 3-phase approach to M&A and shares key insights into what advisors need to know to maximize value, mitigate risks, and ensure alignment with their long-term vision. We discuss the top mistakes advisors make in the M&A process, how to prepare their firm to attract ideal partners, and the critical role of culture and communication in making these transactions successful. With that, here's my conversation with Nicoli Turner.

One of the biggest challenges and opportunities out there is the mergers and acquisition area. So I want to dive into that today. Tell me about what is Schwab doing in that area right now, and what are you seeing in that area right now?

What we see is a lot of sophistication entering into these transactions. So buyers are more sophisticated, even sellers have to be more sophisticated. And so we, through our research, our benchmarking study insights and the experience of our consultants, we have seen a lot. We have researched this and can help advisors prepare for their M&A interactions. And we do that through a framework that has 3 phases. So an envision, prepare, and connect. And through each of those phases, we work with advisors to help them. In the envision phase, we're helping them think about what is their reason for M&A. In the prepare section, we're helping them put actual pen to paper and be ready so that they can be more proactive. And then in the connect phase, we're helping them get more efficient with that so that they can really streamline and hone in on those ideal partners.

Let's talk about both sides of the transaction here. Let's start with the advisor who says, I wanna sell. What are you seeing are 2 or 3 of the most common reasons why an advisor says to themselves, I want to enter into some kind of transaction here?

Yeah, most often it's a journey before they're even willing to say that they're a seller. So that's the first kind of recognition that they need to understand is what is it that they're trying to accomplish for their firm? And so by the time this advisor or a CEO, a founder is ready to say that they're a seller, they have done some thinking about that. And what I usually see is that, that those firms are trying to seek something specific. Sometimes it is that they're not ready to build out the infrastructure, the additional services that they see helps them be more competitive and that really their clients are looking for. Sometimes it's because they need to solve for succession. Other times they're trying to give their employees a career path that they just can't give them. So they understand that merging with another firm gives all kinds of opportunities around the talent space. So there's probably as many reasons out there as you can think of. But sellers that know exactly what they're trying to accomplish are definitely on the right path. They're a step in the right direction.

And if you wanna sell, you wanna sell from a position of strength.

Absolutely.

So how far in advance are you seeing advisors thinking about this and what are some of the key things that an advisor can do to prepare their business to be in the best possible position to get the best price than the best kind of deal structure for themselves?

Yes, I think we work with firms for years sometimes before they're really in a position or even wanting to consider a selling option. The earlier that a firm can sit down and think about their long-term vision of their firm, what are they trying to accomplish? And then understanding how does M&A fit into that? So how does a potential sell, how does that help them accomplish the goals that they're trying to achieve long-term? We have those conversations years sometimes in advance with advisors, but But I think if they're really at that point where they're saying, I think that it's the right thing for the firm, then definitely several months, like 6, 12 months of preparation before they really get into those conversations is helpful. We want them thinking about not only those goals that I mentioned, but we also want them thinking about and envisioning— that's that first phase— envisioning what an ideal partner would look like. What are they looking for? What kind of characteristics? What kind of business model? What kind of control scenarios are they seeking? What is it that they can envision their future being? So having them describe that, put pen to paper, creating that ideal partner profile is really important. And then also, as you mentioned, what are the things that they're doing to prepare for so that they are most valuable to someone else? That is, what is their value proposition? So what do they have that's unique that a partner would be interested in? Not every firm is going to be the same. Some firms are really fast growers, and that's going to be attractive to a buyer. Some firms have excellent talent. They have specialists. They have folks who have a special service offering or capability that they know will be valuable to another firm. So what is it that's valuable about my firm that I know would be attractive to another firm? And then you want to be positioning yourselves with those kinds of buyers because it's going to be more valuable to them than to somebody else.

What about the communication process? So if I'm the owner, founder of the firm, and I'm thinking about doing some kind of transaction, at what point in the process am I going to let my other team members know that I'm thinking about doing something? How do I communicate with them in such a way that they're not nervous about, oh, what does this mean for my job? Am I going to lose my job? What's my career going to look like? How does the communication process work?

That is such an important question. And you're fast forwarding to the third phase of our framework. And that is really understanding and planning out that communication. I think firms, advisors have told us that one of the things that they wish they had done is thought about that a little bit more strategically. So we help firms sit down and think about that. Oftentimes one-on-one communication, if they're able to, if the firm is of a size where they can go one by one to those stakeholders, that is really important. I've had an advisor tell me, you know what, I gathered the firm together. We all got in a room and we We described what we were doing, what we were planning, but I wish I had gone to each of my folks individually and talked to them about it so that they could ask me their questions, that they could, we could talk about what fears they have, and we could understand and be aligned on why this was the best move for the firm. So the communication plan, so there's going to be times when you're not able to tell everyone as early as you want to, but having a plan for when you can communicate that Understanding the messages that you're going to share, giving the reason why is this good for the firm? Why is this good for the employees? Why is this good for the clients? Not leaving those things to the imagination, but actually spelling them out and letting people in on that and understand that.

Let's go back through these 3 steps that you were talking about: envision, prepare, and connect. Let's take each one of those, and what would you say are the biggest mistakes that advisors make in each of those 3 phases?

Oh, this is a fun topic. Yeah. So the biggest mistakes that we see in Envision is that really folks skip this step. They want to get into M&A because everyone seems to be doing it, so they think they should be doing it too. So they get into it without having a, a strategic rationale or a reason behind it. So that's the number one biggest mistake because that's gonna be a hard transaction if you're doing it just for the sake of doing it. It's unlikely that you're gonna really achieve the kind of success that you could if it was more thought out or more well-planned. The second— I'm going to give you two for this one— the second mistake that I see often is that firms don't really think deeply about what kind of value creation a transaction would be. They say, I'm going to get into M&A for growth, but they don't really dig into what does that mean? Does that mean growth in geography? Does that mean growth in talent? Does that just mean growth in assets under management? So getting a layer deeper and really understanding so that you can set yourself up for success to achieve those things that you're looking for, those synergies or that success that you're trying to achieve. That's for envision. For the prepare section, what we see is that firms are often a little too reactionary in prepare. So there is actually a tremendous amount of work that a firm could do to be more prepared and proactive. So. Whether it's again, a buyer or a seller, the biggest mistake is that folks wait until the moment that it's happening and then they prepare, then they create the document, they contact their attorney, they talk to their staff, they figure out their technology. But a lot of that can be done in advance. There is a tremendous amount of due diligence that needs to be done on both sides. So there's due diligence for a buyer, but there's also reverse due diligence for a seller. That can be thought out, that can be planned. You can have your list of items that you know you're going to request and a process inside your firm to absorb that information or to provide that information. So the biggest mistake in the prepare section is just being reactive when there's time and there's resources to help you be more proactive. The last phase, which is connect, the biggest mistake we see there is that people do that first. They actually go right, they say, we're interested in some M&A, we're interested in potentially acquiring a firm and they start going to lunch, they start shaking hands and kissing babies, as I like to say. And they do that without having the other pieces in place for their business, for their firm. So they haven't really thought through how that would work in terms of operations. They haven't thought through how that would work in terms of technology. They haven't thought through what would make one firm more valuable to them than another firm. All of those things can be thought about. Described, documented so that it can be a much more streamlined process. So there's a time and a place, obviously, for the connect to meet potential partners, but we think that is the third phase, not the first phase.

There's an ecosystem out there in the whole M&A space. You mentioned Schwab does a lot of work here, has a lot of resources to help advisors think through this whole process. What are some other resources or avenues that advisors should avail themselves to as they're thinking about, say, this envision phase and this prepare phase? I'm imagining they're going to be wanting to talk to other advisors who have gone through this and that sort of thing. So what are some of the due diligence practices that advisors can do as they move along these 3 steps as you've outlined?

Yeah, I think definitely getting alignment within the firm. That's really important in that envision stage and internal alignment. But then, yeah, I think talking to other advisors is always a great practice. Connecting with the community because advisors are tremendously generous with their advice and willing to say what hurdles they had to overcome, what missteps they had. So that's a great piece of advice. The other thing that we hear from third parties, so such as the attorneys and other experts, investment bankers, is that firms don't go to them early enough. So they want to be brought in earlier and they can be brought in earlier so that they can have a little bit more of a strategic advantage. Whether it's drafting documents or getting advice on how they might approach even the earliest part of the funnel. So that's a mistake that we see, and, and I think that people can get those third-party folks into their ecosystem a little bit sooner. So even if it's a banker, you want to develop that relationship ahead of time. You want to develop that relationship earlier on.

Tell me a little bit about the different types of structures that are available for advisors. For example, you can be acquired in full by another firm and now your name goes away and now you're basically employees of this bigger firm. Or maybe you're just taking an outside investment or lots of different ways. So tell me about some of the more popular ways that you're seeing and, and any caveats that you would have for some of the different options out there.

Yeah, we definitely see a spectrum of options out there and in each of those buyers would tell you that they have a differentiated value proposition for their model. But I think you can generally think of them as your strategic acquirers that are thinking about whether it's geography or trying to accomplish some sort of larger goal. You can also think about it in terms of control. So the more, as you mentioned, like the integrators where you're going to integrate into a firm, you're gonna, you're gonna lose your former name, you're gonna adopt the identity and the brand of that larger firm. In those instances, you're giving up quite a bit more control. There's all sorts of sliding scale spectrum there where you can also have a buyer who is more financially motivated. So they're going to make a financial investment in your firm, and then you're going to retain more of that control. You're going to oftentimes you'll retain your name. You'll retain a lot more of the day-to-day business decisions. And then you have platform providers. So you have folks that are going to, you might form a partnership so that you can take advantage of their scale, their size, their offering. Other things that they might be able to do for you so that you can spend more time with clients. Each of those sort of options, those are big, 3 big buckets of options. There's variations between that. I think it's important to understand what is valuable to you. Do you want someone that's going to take away the day-to-day business operations? Oftentimes advisors, founders don't want to do that anymore. They just want to spend their time with clients. So there's options for that. There are the folks that want to be part of a larger brand, that want to be part, that we want to fully integrate into another firm. So there's absolutely a sliding spectrum of opportunities and different potential acquirers out there.

Let's flip over to the other side of the transaction and talk about the acquirers. What is their main motivation? What are some of the key objectives that they typically have? What are they looking for in a potential partner that they wanna merge or acquire?

I'm hearing more and more that acquirers are seeking talent. We know that there is a tremendous need for talent in this space, and so Through this inorganic activity, firms are being able to acquire talent that has been difficult over the last few years to gain. So talent is definitely a motivator. We see lots of emerging large national firms where they're seeking a national footprint. So from coast to coast, their name is out there. They're representing a firm and a model, seeking people geographically that will enhance that national footprint, that will be able to support that. Of course, there's firms that just are also looking to be bigger because of the, what they can accomplish with that scale. So more assets, more offerings. We know in this space that advisors are having to do more and more, offer more and more services. Sometimes that is their goal with acquisitions is to be able to acquire those specialty capabilities and talents.

And how do they integrate after the transaction? Because I, sometimes I shake my head and I see some of these big firms and it's like acquisition after acquisition. And they haven't even had a chance to digest the previous one. What are you seeing in terms of what are they doing to get these new firms integrated, to get them all on the same technology, to make it as seamless as possible for the clients and for the advisors that are being acquired? What are some of the, the best practices that you're seeing there?

Yeah, the best integrators, so the firms that really want to integrate these acquisitions, these other, these firms into their model, they have thought through this process and they have created a process so that it becomes very predictable, repeatable, and it's less complex. So they are very clear on what technology they're gonna use, what investment philosophy they're going to have. They're very clear about their culture, hopefully really clear about that. And so they are able to prepare the seller so that they understand what the experience is going to be like. And they have that experience helps them be able to do it time and time again, faster. The hardest deal is going to be your first deal. So these integrators, the ones that are truly integrating firms, they've done this several times. They've developed best practices, they've developed processes, they have internal teams that are dedicated to this. I think that's one thing that people underestimate is the amount of resources it takes to actually do inorganic activity. Whether you're a seller or a buyer, there are resources involved in that. So these firms that are integrating the best, in my opinion, they have created those teams, created those processes. They're able to tell folks upfront what it's going to be like. So they show them the path to that integration.

And are you seeing that one of the reasons why a lot of advisors go independent is because they're like, hey, I want to use this piece of software and I want to work with this money manager and this alternative product. And so they want to have the choice. But then if you are selling your firm, you're stuck with the firm that you're going to be selling to or merging with. And so obviously you're going to try and find a firm that has the best fit, but of these acquirers, are you seeing that, oh, they're typically going to be on Salesforce. So every firm that they acquire, they're now going to go onto Salesforce or have they narrowed down into one tech stack and everyone is on that one tech stack or do they allow variations because they know they're acquiring firms that are, they have their pet software systems that they want to keep?

We see most of them moving toward one sort of technology solution, but there are acquirers out there that are more on the financial side where they're going to make a financial investment and then they're going to let that firm run the way that they have been running. So for a firm that's really particular about their kind of technology and then it doesn't fit into that integrator model, they're likely going to seek a partner that is more financial in nature and allows them to continue to do their their pet technology systems, their pet operation systems, whatever it is that they've been working on. And if that's working for them well, and if that's what they want to continue doing, then they would be looking for a little bit of different kind of buyer. We do see the acquirers moving more and more toward a one-model approach. Again, you're going to be able to find all of the flavors out there, but we do see a lot of those acquirers moving to, this is how we can achieve a little bit more efficiency, a little bit more scale by having everyone come onto the same system.

Speaking of efficiency and scale, Schwab has been doing the benchmarking study for many years now, 18 years. And I'm always fascinated to see that when people talk about, we're doing M&A because we want to have scale and size gives us scale and so on and so forth. Yet when I look at the data in your study, it doesn't indicate that there's like a big increase in profit margins for the larger firms relative to the small or midsize firms, and maybe there's a little bit of efficiency in terms of, uh, the number of clients that a professional can work with, but I'm not seeing like big differences. Am I reading the data wrong? Is, are you seeing something different or do these big firms that are acquiring, they absolutely have economies of scale and they've got higher profit margins and that, what are you seeing in the data?

No, I, I see the same thing. And I think when you look at the data, the benchmarking data, you can see that they are growing. So they're accomplishing some of their objectives, those strategic rationales that we talked about earlier. They're accomplishing the growth in AUM, they're accomplishing the growth in revenue. But to your point—

is it organically or just through the M&A business in terms of the growth?

We see them growing faster when they have had inorganic growth. They are able to accomplish those kinds of growth targets. But to your point around efficiency and profitability, we do see it flattening out and sometimes even dipping. What I think is interesting to see is over time, Will these firms be able to start to improve those efficiencies? Right now we see marginal difference in productivity and a little bit of that compression there with profitability, but you're dealing with a much larger, larger business. So we think that there's a little bit of a slump, right? It takes a while to integrate a firm. It takes a, especially these ones that you're talking about where they're acquiring multiple firms over in a year's period of time. Trying to get all of those folks onto, there's gonna be a lag in the efficiency and the productivity. So I think it'll be interesting to watch and to see if that comes to more of a fruition. But we see that they're accomplishing some of their growth goals, but not necessarily seeing it in the numbers in terms of productivity and profitability.

There's obviously a lot of smart people that are doing this M&A, so they've run the numbers, they know what they're doing, and I'm wondering if it's sort of like Amazon in that in the first maybe 20 years of Amazon, everyone was like, they're not making any money yet. They're worth billions, tens of billions, hundreds of billions of dollars. How does this work? Amazon, of course, was in growth mode and they're building out all of these centers where they could store all of their inventory so that they could ship stuff faster from a more local location. And today, fairly profitable. And so it did work. And to your point, it may just simply be that as these firms are in this big growth mode, They're reinvesting back into the business. The profit margins are gonna be lower, but if they wanted to turn the spigot off, so to speak, profit margins would probably go up pretty quickly because they're not investing ahead of the growth curve and that sort of thing. So to your point, might be just take a little bit of time here and we'll see those margins go up if they decide that we're now gonna digest what we've done, get some profit margins back up again.

Exactly. I think that's a great analogy and that's what we think we're seeing right now.

Let's talk about the culture side of this. Obviously, we know culture is critical. What are you seeing in terms of the acquirers and how they're thinking about what they want to do with the culture of the firm that they just acquired? For example, are they sort of requiring the firms that they acquire to take on the culture of the firm that just bought them? Are they looking at some of the firms that they acquired to inject a new element to the existing culture? Maybe they need a a higher sense of urgency or what have you, or they need to be more innovative, so they wanna acquire a firm that maybe is really good in that and enhance the culture of the bigger firm. What are you seeing when it comes to culture?

What I see, uh, when it comes to culture is that every firm is talking about culture. Every firm acknowledges that culture is first. Culture is most important, and that's what folks will say. Where I think there's an opportunity is to have folks really quantify and qualify what does culture look like. So their own culture first, what is it that our culture looks like? How can we describe that? How can we quantify that or qualify that? And then also what does a potential acquisition look like in the same terms? Like what is their culture currently today? And then I think that would allow them to have better conversations around that integration period that you talked about. What is going to be the dominant culture, if you will, what's going to be the way that we're going to expect folks to behave, decisions to be made, et cetera, versus what kinds of things can we expand or be more flexible on. What we see is that folks are acknowledging that, that culture is really important. And there's this expectation that once there is a merger happening, that people will be enough the same that we'll just get along. I think there's more we can do about that. With that, with culture, and would help the integration go smoother and help achieve those synergies that firms are trying to set out, that value creation from having two firms come together that they're looking for. We think if there's a little bit stronger focus on culture, that they can achieve that faster, better.

You mentioned quantify culture. How do you quantify culture?

We're working on an assessment that would help firms be able to quantify responses to some questions that would help them identify where they're at on a spectrum, on a grid, if you will, and then be able to look at other firms and compare themselves against each other.

Let's talk about some of the overarching trends or outcomes that may happen with all of this M&A that's taking place. And one of the big ones that I think about is a lot of people who are leaders of these big firms today came from the wirehouses and they left the wirehouses because they said, yeah, I think there's a better way to do this and I want to be more client-friendly. I want to have more freedom to do what I want to do. Yet they're going out, they're acquiring all these firms, they're becoming $100 million revenue firms, billion-dollar, multi-billion-dollar revenue firms. And I'm thinking, are we just recreating the wirehouse model where we now have all of these employee advisors, we've got systems and processes and bureaucracy, and we've compliance. And so we're recreating the warehouse, which is where a lot of these people wanted to get away from. So A, do you agree that could be happening? And B, if so, what can we do to not simply recreate the warehouse model, but try and improve upon it?

I think you're right in the sense that it looks like we might be recreating some wirehouse models, but I think when I look at the leaders of these firms, I see them very deliberately trying to create something that is new, that is better than a wirehouse model. They're trying to capture the best of both worlds, really. The scale that comes with having lots of offices, lots of advisors, and, and the amount of end clients that they can help through that model. I think there's still a dedication to that. And so it, it's a balancing act to see if they can achieve that through scale, but to stay away from some of the things that they were leaving from the wirehouse model that holds true to the fiduciary model that holds true to what built the RIA industry. And they're just trying to do that with scale, showing that it can be done on a large scale.

As we wrap up here, In your role here at Schwab, you work with a lot of advisors. You have all the details on the benchmarking studies. You really got your finger on the pulse of what's happening out there. What causes you restless sleeping nights about this industry?

I think the thing that causes the most sleepless moments, or the thing that I think about a lot, is the integration. I think there is a tremendous amount of work to do still to help firms truly integrate, and that's where the magic happens, right? That's where 1 1 hopefully equals more than 2 or 3, right? It equals 3 or 4 or 5. And how firms are being able to integrate and to capture those synergies, they just have to be super clear about it. I still see firms that are not quite being able to capture what I think is the desired synergies when they went into a transaction, when they went into a deal. We still see firms trying to sort those things out. Integration is hard. Integration is tough. And so I think there's still a lot of work to be done there. And I think that Schwab is positioned to help firms. We see firms long before they even think about M&A. We see them when they're in the middle of M&A transactions. And we're also here at the end of that. So we see what happens after the deal. And I think that there's still some more work that can be done there.

And speaking of what happens after the deal, there was an article in Financial Advisor Magazine earlier in 2024 I think it was from the Prince brothers or father and son. They do some research in a lot of different areas and they surveyed a bunch of advisors who had merged their practices with other firms. And what they discovered was approximately half of those advisors who had sold their firms were unhappy after the transaction. And A, Are you seeing that roughly, seeing those kind of numbers as well? And if so, what advice would you give to an advisor who's thinking about selling? They're in that envision phase, let's say. What advice would you have for them to not have seller's remorse?

I wouldn't say that I know that half of them are unhappy. We definitely see folks who are not as happy as they thought they would be with their transaction, with their merger. There's definitely hiccups and bumps maybe that they didn't foresee. Prior to the transaction that come up afterwards and creates a little bit of that discomfort or that dissatisfaction. Some firms will divest, right? They will exit and reform a new firm or do something different. We see that happening. I think in order to prevent that, it comes back to what Schwab really wants to do, which is to help firms be as prepared as they can be to really think through long-term, what does this look like? What if the firm that you sell to ends up selling themselves? What does that look like? Have you thought about that? Could you, is that something that you're flexible with that you can envision how that would work out for you? Really taking firms through the long run of that and helping them be more prepared, I think, is how we can help them.

Yeah, and I think that's a really good point there about with all the M&A that's taken place, if you merge with Firm A and then Firm A gets, gobbled up by Firm B and Firm B gets gobbled up by Firm C. Again, that's the old wirehouse. That's how we got the big wirehouses is they just kept acquiring and acquiring. And, but I'm sure the leaders of these firms today, again, they've grown up in that environment. So they've, I think, learned from the potential mistakes back in those days. And to your point, they're doing it in a better way and trying to get the best of both worlds. So let's finish with a final question here. Let's move 10 years into the future. You put your crystal ball. Hat on here, you look into the crystal ball, what do you see for the industry? What excites you about the next decade in this profession?

What absolutely excites me is just the rapid change that we are experiencing. There is so much technology available to advisory firms now that just wasn't there before. I think that we will see a whole new way where we can optimize the client relationship and hopefully deepen that human connection while using technology to do some of the other efficiency things that we talked about. I think we will see several large mega RIA firms that will have scale and geography and have a real presence. But I also think that we will continue to see new entrants. We see that today. We see thousands of firms starting up every year. So we'll continue to see those new entrants. What I'm excited about is just how quickly advisors are starting to adopt that change. And I think it, we just, We don't even probably know what it'll look like in 10 years because it's changing so rapidly and it's exciting.

It is indeed.

Thank you.

Thank you.

All right. That's all for today. Make sure you like and share this podcast through your favorite social platforms. And for more great podcasts, visit us at barons.com/podcast. Take care and be safe.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.