How leaders can keep advisors after the M&A honeymoon ends

3 tips for leaders to keep talent, post-M&A honeymoon

September 15, 2023 6:06 PM

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Even worse than the divorce rate in America is the failure rate for mergers and acquisitions — over half of deals in the wealth management industry fail, according to a recent Fidelity study.

But even after a deal closes and the conjoined firms begin a new life together, there can be trouble in paradise. The sale last month of the former United Capital from Wall Street investment bank giant Goldman Sachs to Creative Planning for an undisclosed sum, a mere four years after Goldman bought the RIA for $750 million in cash, illustrates the risks all firms face in what Mark Huber calls the "aftermath of a transaction."

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"They do the announcement. Everything is perfect. There's all these 'synergies' that are going to happen," said Huber, the CEO of Birkman — a tech firm that helps companies from different industries create and retain high-performing teams, including in the wake of a deal.

In reality, "most transactions fail to realize the promised result," Huber said. In his own career, Huber has sold several ventures and been part of over 30 transactions — and he's made several mistakes himself, which he said now informs his work with firms.

So as the wealth management industry continues to churn out big deals this year, the question for a leader is: How do we make this partnership last?

Financial Planning spoke with two leaders on what they've done to avoid shedding talent in the wake of a merger or acquisition. Below are three tips they shared for their peers.

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Establish cultural alignment before the ‘marriage’

Just as marriages often fail because of inherent incompatibility between partners that should have been recognized far in advance, frequently mergers and acquisitions fail for the same reasons.

Ken Stern, the president of Lido Advisors, a Los Angeles-based registered investment advisor that has frequently bought other firms, said in an interview that one of his own biggest mistakes in past deals has been failing to plan for the human side.

"We always talk about the quantitative side. … We can have all these cool models that we build and be really, really proud of these models," Stern said. "But if the culture isn't aligned, that is literally the nail in the coffin."

Stern said that while private equity buyers have become more prominent in dealmaking, many such buyers have retreated from purchases they made. "Over the last year, you've seen private equity firms sell to other private equity firms," he said.

The problem is often a lack of "cultural fit" — which can sound vague, but to Stern means concretely that those working at both firms must have common goals and priorities. In Stern's case, the priority is not growing a big book quickly and selling that soon — it's "building an incredible client experience" for long-term value creation.

Stern said he talks to the other side's advisors long before a deal closes and reviews employee surveys to see what his firm can add that improves upon what the potential partner firm needs. Once he moves into "an exclusive," the dealmaking equivalent of going steady with someone and "moving towards marriage," he attempts to talk to everyone in the new firm.

Prepare to handle 'founder's syndrome'

One of the biggest ways to flub a deal integration is failing to offer founders of the acquired firm a clear role to transition to, Huber said. "Because now this guy who's been in charge is floundering. And now he's in stress because he doesn't know what's happening. He can't control what's happening." This creates a distressing situation often known as founder's syndrome.

The rank and file employees, who still feel loyalty to their former head, may also experience disruption and turnover as a result of the unexpected changes, Huber said.

Founders in particular are often individuals with temperaments that make it difficult for them to accept the transition from being the one in charge to taking orders from others, he added.

"They created this thing, and now you're just tearing it apart," Huber said. "They put everything into it. Watching you harm it is really difficult — even though the reality is, assuming you're correct, you are really trying to help that baby grow."

By making it clear ahead of time what their new role is, and telegraphing to their workers how that will stand to benefit advisors and clients, buyers stand a better chance of retaining their critical talent.

Engage all affected employees and clients

After the deal goes through, the new leadership should engage all affected employees and clients, "define who does what" and over-communicate to avoid confusion and the buildup of mistrust, Huber said.

"This is where a lot of value gets destroyed. And it doesn't take a lot of time to destroy it."

People need to be reminded of their new and shared purpose, and made to feel safe to speak up and ask questions, Huber said.

"Tell people what you're going to do, actually do it, and bring them with you," he said. "As opposed to just: 'Here's where we're going.' And then looking back six months later, nobody's there."