Originally published in Financial Advisor

By Mark Hurley

When a tsunami forms in the deep ocean, it creates a small but visible wave as it travels. But unless it crashes onto a shore near a populated area, few people ever know that it existed.

For the last decade, there has been a great deal of talk about another wave—a demographic one—that will sweep through the wealth management industry. The average age of advisory firm founders is about 62 and at some point soon, many of these owners will need to do their own financial planning and sell their firms to their successors or an outside party.

However, although there have been several firms sold over the last few years, no one would describe this as a tsunami of deals. And to be sure, many (if not most) founders will ultimately just fly their businesses into the ground, getting paid next to nothing by their successors for what they have built over many decades. But for a large number of these owners, such an outcome is very bad news because it means that their retirement lifestyle will be a lot less attractive than they might have hoped.

So why aren’t we seeing large numbers of transactions?

The reality is that we are. Our firm alone is currently involved in nearly 20 different potential opportunities, and a banker from one of the top firms that advises with wealth managers told me yesterday that the firm’s forward-looking pipeline has more potential deals than at any other time he can remember.

But for several reasons, much of this activity is hidden from plain view. For starters, it takes a very long time to close a wealth management deal. Hence, a deal that you hear about today probably first came to market 18 to 24 months ago.

Also, when owners bring their firms to market, they don’t exactly hold a press conference to unveil a “for sale” sign. Rather, petrified of the reaction that clients (and, in some cases, even their successors) will have to news the firm is being marketed, most advisors will only let a very limited universe of people ever know about a potential transaction (and all those people are required to sign non-disclosure agreements).

Furthermore, prospective sellers (and their bankers) only show potential opportunities to those few wealth managers they are certain have the money in hand to fund an acquisition. Understandably, no rational seller would ever consider taking the risk of running a full transaction process only to learn that the winning bidder doesn’t actually have the cash.

More important, only a small percentage of the firms that are brought to market are successful in getting a deal done. Our experience over the last eight years is that only about one in 20 firms trying to sell to either its successors or to an outside party succeeds.

A big reason is that many firms, to put it simply, just don’t have anything to sell and they come with a lot of baggage. Some aren’t really “businesses” but rather glorified “books of business.” Others generate most of their revenues from very few clients or have an unusually old client base that is poised to become less profitable over time. In still others, the relationship between the founders and the successors is about as warm and fuzzy as that of Robin Givens and Mike Tyson.

However, even after disqualifying these putative sellers, there are still a very large number of firms that are never able to get deals done. In no small part, this is because most buyers and sellers are clueless about what their counterparty is actually thinking and wind up talking past each other (or become persuaded that the other side is nuts). And, thus, are unable to arrive at an agreement.

(In fact, we have found that psychology is far more important than economics in these kinds of transactions. So much so that we will be publishing a white paper later this month—which can be downloaded for free at www.fiduciarynetwork.com—that explains why and how buyers and sellers view and approach transactions differently and describes the steps either can take to enhance their chances of success.)

So while there is a deal tsunami that is forming, it is hidden. Few people actually get to see it, and most of this wave will ultimately never hit the beach.

If you own a wealth manager and have dreams (or perhaps delusions) of acquiring other firms, all of this is really bad news. Why? Well, for every potential buyer there are very few firms that make sense as acquisitions. Even fewer of these will ever be able to get deals done and you probably will only learn about them when they announce that they have already been sold.

More problematic is that you are competing with much savvier peers who have positioned themselves to capitalize on this hidden tsunami. These firms have done their homework and understand all of the factors that go into getting a deal done. They also have lined up the necessary capital to fund potential acquisitions and, hence, are invited to the table when deals come to market.

Additionally, these savvy buyers aren’t just sitting and waiting for deals to show up on their doorsteps. Instead, they have developed and implemented detailed acquisition strategies. They have studied the industry landscape to identify those firms that might be potentially sold over the next five to 10 years and are investing a great deal of time and effort to build relationships with the owners and successors of these potential sellers.
They understand that the greatest competitive advantage one can have in wealth management M&A is a pre-existing relationship with the seller.

Certainly (and unfortunately), I am describing only a very small number of firms. And a decade from now, many of them will be among the industry’s largest and most profitable wealth managers.

In contrast, most of today’s self-described prospective acquirers are blissfully ignorant of what is actually going on. They fail to see just how unlikely in general it is for a wealth manager to acquire another firm and that a passive, wait-and-see acquisition strategy has almost no chance of succeeding. And by the time they figure all of this out, the M&A wave will have passed them by.

Mark Hurley is the founder and CEO of Fiduciary Network.