One of the biggest challenges for small, independent RIA firms is that they are self-reliant with respect to designing, choosing, and implementing the systems, technology, and processes that they use. Some firm owners relish the responsibilities of building and maintaining a firm from the ground up, but others – who may be happier with simply advising and building relationships with clients – might find it more appealing to merge with or sell to a larger firm that has the resources to handle the back- and middle-office support and leave the advisor to the work that they enjoy most. However, advisors who choose to merge or sell may end up regretting the decision if they find themselves tasked with new and unexpected responsibilities, mismatched with the new firm’s culture, or missing the freedom that they had enjoyed as an independent operator.

In this guest post, industry commentator and Inside Information author Bob Veres relates the stories of advisors who relinquished their independence – often for sensible reasons, such as succession planning or to solve challenges of firm growth and complexity – and what they learned about the experience that they wished they had known beforehand (that other would-be sellers may want to know before they face a similar decision).

The first major lesson about selling an advisory firm is the sheer amount of work involved in doing so, from finding (and doing due diligence on) potential buyers to migrating systems and technologies over to the new firm. For a firm owner who expects the sale to make their life simpler, the enormous project of transitioning can often be the opposite of what they expect.

Second, once the merger is complete, firm owners often discover that the culture of the new firm clashes with their expectations. Firms seeking acquisitions may talk up their values prior to the sale, but the reality is that at a firm that is rapidly acquiring other businesses – particularly when funded by private equity ownership – the focus is often on the growth of assets and profitability, no matter what the core values are purported to be. And when the acquiring firm is much larger than the selling firm, the much more rigid structure of the larger firm (particularly relating to compliance and personnel management) will almost inevitably conflict with a previously independent firm owner who is used to making their own decisions.

The third major lesson is that RIAs that acquire independent advisory firms are sometimes acquired themselves by still larger firms. Independent firm owners who have taken pains to ensure that their acquisition partner is a good fit in terms of culture, processes, and services have gone on to see their work being undone when the partner is subsequently eaten up by a bigger firm with little interest in preserving the original independent firm owner’s vision.

Ultimately, many of these issues are simply tradeoffs inherent in selling an advisory firm, which necessarily involves the owner giving up some (or all of) the control that they're accustomed to. However, for advisors who are considering a sale – which, despite the potential pitfalls, still can be an important part of the journey for succession planning and growing the firm beyond an individual advisor or owner – the key point is that the reality of going through an acquisition often doesn't match up with the owner’s expectations. And while it's common for media to focus on the success stories, it can be just as helpful to hear about advisors' experiences when their acquisitions don't go just as planned, so future advisors can learn from the benefit of hindsight!

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Recent years have seen an increase in the number of RIAs charging fixed monthly retainer fees, and while retainer fees can have several advantages over other types of fees, one notable disadvantage – particularly as compared to traditional AUM fees, which tend to increase automatically in line with financial markets – is that financial advisors who use them must proactively raise their fees from time to time in order to keep up with business expenses, invest in new upgrades, and increase their own take-home income. The necessity of fee increases entails a certain amount of pain for monthly-fee advisors since each conversation around raising fees creates the possibility of pushback from clients that could put a strain on the client-advisor relationship.

This is all the more true when clients are dealing with cost increases in other areas from high inflation, yet the reality is that many advisors are also facing inflation in the form of higher business costs. As a result, monthly-fee advisors may see a decrease in their take-home income if they don’t increase their fees at least enough to keep up with their rising business expenses.

But using business costs alone as a justification to raise fees can backfire on the advisor. For one thing, it limits the amount that an advisor can raise their fees to roughly the rate of inflation in their business expenses, which translates into no net increase in take-home income. And even more importantly, higher business costs as a rationale for raising fees is bound to ring hollow with clients since they are likely to care much less about the advisory firm’s expenses than about the fact that they will be paying a higher fee going forward, 'just' to receive the same level of service they were already getting.

A better way to implement and communicate fee increases may be one that is centered around providing more value to the client in exchange for the higher fee. To start, this signifies a client-centric approach, shifting the basis of the increase from the advisory firm and its needs (to maintain its profit margins with higher business costs) to the client and what the fee increase means to them. Furthermore, it increases the potential for the amount that the advisor can increase their fees since clients are more likely to accept a higher increase when there is clearly something in it for them as well!

When communicating fee increases to clients, then, it’s important to be concrete and confident about how the advisor will bring extra value to the relationship (which, of course, means having a plan to deliver that value in the first place). Because, while any conversation around fees comes with the possibility of client pushback, that extra value represents a powerful argument for why it's in the client’s best interest to go along with the change – and if the client ultimately decides they don’t want to accept the higher fee and ends the relationship, it creates a new opportunity to add clients who do see the value in the higher fee.

Ultimately, nearly every advisory firm that charges monthly fees will eventually need to raise those fees to at least maintain a steady take-home income. But advisors who want to grow their income beyond ‘just’ the rate of inflation in their business cost can do so by stepping up their value to their clients – whether in the form of more services, better technology, or just greater experience and expertise allowing them to go deeper into planning!

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