Three ways COVID-19 changed mergers and acquisitions

An RIA merger or acquisition (M&A) is a delicate mix of strategy, trust, and data. For many firms, all the meetings and late nights are worth it. A good fit can bring new opportunities for employees, add capabilities for clients, and accelerate firm growth.

However, COVID-19 brought new questions and concerns to the M&A process. Some pundits speculated that M&A would dry up. But many firms went ahead making deals because the opportunities were too big to pass up or delay, especially once it became clear how resilient the RIA industry truly is.

So, how'd they do it? Here are three COVID M&A success stories that offer insights into the process—whether there's a pandemic or not.

Trust takes more work

Diane Young is a planner by nature and training. For years she tried to bring on a successor for Athena Financial, but struggled to find the right person. 

After COVID-19 hit, conferences went virtual or were postponed and networking events were cancelled. Like many advisors, Young turned to RIAConnectTM to make connections. The platform was offered by TD Ameritrade to match people in the RIA industry looking to solve for firm goals such as succession planning, inorganic growth, buy/sell/merge opportunities, or adding talent. That's where she met Rob Santos, the CEO of Arrowroot Family Office 

Arrowroot is an independent advisor and financial and tax planning firm that seeks to provide a high level of service, transparency, and value to its clients. Young saw a connection right away with her own goals and liked how Santos approached the partnership.

"The first time we talked it was clear that we had a lot of synergy. We had shared values, a shared vision. He focused on understanding the things I want to do and didn't want to do," says Young.

"People looking for a paycheck and then walk away in six months—that wasn't attractive to us," Santos adds. "Someone like Diane, who brought a tremendous amount of expertise and talent and entrepreneurial spirit was what we were looking for."

Young, Santos and team built trust quickly through conversations and due diligence work. However, the distance created by COVID meant that building trust with Young's clients would take a little longer.

"There was trepidation with some of my clients. We are Midwesterners and merging with a California firm made some people worry that there would be a culture clash," says Young. 

Santos hosted a webinar and made himself available in other ways, but it wasn't the same as being there in person. "We would have had some dinners. We could have gotten to shake hands, talk to them one-on-one," Young says. Together, Santos and Young made sure to communicate multiple times in various ways with each client—via email, text, Zoom, or however clients preferred to be in touch.

In the end, only one client didn't transition. 

Firm culture has to be intentional

A firm's culture is more than a set of values. It's relationships—built person by person. When Homrich Berg acquired SG Financial Advisors, the principals knew each other well (Sammy Grant used to be a lead associate at Homrich Berg). What was missing in the early days of COVID-19 was the chance for Grant's team to meet the Homrich Berg team.

"We knew names and what they looked like on Microsoft Teams, but we couldn't walk across and say hello in person," says Grant.

The two cultures really began to gel when the office reopened in June 2021. "We've seen how quickly the dynamic has changed since then," says Grant. "Being able to get together for meetings or social gatherings shows how much easier this process would have been had it been in-person from day one."

"The most important thing is not economics. It's the cultural fit," says Andy Berg, CEO of Homrich Berg. "You have to have a lot of the other stuff to get the deal done, but if it's a cultural fit, you're already past the 50-yard line."

Due diligence increases

Mercer Global Advisors serves more than 20,000 clients nationwide and manages $32 billion in assets across 65 offices. A firm as large as Mercer needs a lot of advisors and specialists to create a compelling client experience for a large base. That's why, in 2020, Mercer began the process to acquire Kays Financial Advisory Corporation in Atlanta.

Scott Kays, the founder of Kays Financial, has known Dave Welling, the current CEO of Mercer, for many years. There was a familiarity that made early conversations go smoothly, despite having to plan over Zoom. But that extra bit of distance meant that vetting was even more important.

"Due diligence went way up for both parties," says David Barton, M&A lead at Mercer. "Reverse due diligence (vetting by the seller) quadrupled over the COVID pandemic."

Each RIA firm took a close look at how the other served clients, the nature of the client relationships, how client information is tracked, back office processes, the cultures of each firm, the expertise each team brought to the bench, and more. Leaders at both firms participated in a lot of frank, open discussions. Kays also talked to leaders of other firms that were acquired by Mercer to find out whether Mercer followed through on its commitments. 

And while successful deals are really about the people involved—the buyer and seller, the employees, and of course the clients—the economics are also important. Growth rate, the ratio of clients in an accumulation versus decumulation phase, how clean the financials look—each team reviewed every detail closely to make sure this move was the right one.

"You have to know your numbers," says Barton. "I don't know how many firms I've talked to that send me their financials and I can't even read them. They're all over the place. They don't know their client tenure. They don't know client retention. They don't know where the business is coming from. Nothing's documented."

With or without COVID-19, Barton thinks due diligence will continue to increase in intensity. "High due diligence is here to stay," says Barton.

What you can do next

  • Check out the Assets in Motion report from our latest research on mergers and acquisitions within the RIA industry.
  • Read RIA Industry M&A: Behind the Numbers, which offers further insights from independent advisory firms about their experiences with M&A.
  • Consider a custodian that invests in your success. If you're thinking about becoming an independent advisor, contact us to learn more about the benefits of a Schwab custodial relationship.