Acquiring a Wealth Management Firm

What should banks consider in the acquisition of a wealth management firm?
Due diligence of the firm’s existing operations and financial condition is paramount. While wealth management firms are typically registered as investment advisors with the Securities and Exchange Commission (SEC) or a state securities regulator, depending on the amount of assets under management, such firms are not subject to the same degree of regulation as a banking institution. An investment advisor background check should be completed, which can be done through the SEC’s website. A review of any existing litigation and/or outstanding liabilities also should be conducted. Many small wealth management firms are structured as limited liability companies or Subchapter S corporations, may be operated similar to a sole proprietorship and may not have audited financial statements of their business operations. As such, a close review of the firm’s accounting procedures, books and records is necessary. The amount of assets under management and the number of accounts managed by the wealth management firm, including the trends of both over a period of time, is an important aspect of due diligence, as is a determination of whether the firm’s revenues are fee-based or transaction-based. If the firm has several investment advisors other than the primary owner or owners of the firm, it is also important to determine whether such individuals are instrumental to the business and, if so, whether they would be a part of the acquisition.

What considerations are taken into account in determining the value of the wealth management firm?
To determine the value of the wealth management firm and the price to pay to acquire one, a bank should engage a firm that specializes in valuations of wealth management and investment advisory firms. Such an expert will conduct its own due diligence of the target firm and will prepare a valuation for the bank utilizing a market value approach, a discounted cash flow approach and a pro forma impact analysis (which measures the impact the acquisition would have on the bank’s earnings on a pro forma basis.) The valuation firm will also provide the bank with an analysis of acquisition pricing multiples for other advisory firm acquisitions and an implied acquisition value for the target wealth management firm. The implied acquisition value would be set in a range that the bank would use to establish an offer price for the target firm, if it determines to proceed with the acquisition.

How should the bank structure an acquisition of a wealth management firm?
Depending on the structure of the wealth management firm and how the bank intends to operate the firm, as a division of the bank or as a separate subsidiary, the acquisition may be structured as an asset purchase or an entity purchase. In an asset purchase, only the assets are acquired, and in an entity purchase, all the assets and liabilities are acquired. It may be possible to simply hire individuals and acquire their book of business through contract, building the acquisition cost into the individual’s compensation over an agreed upon term.

Are any regulatory approvals required to acquire the firm or its business?
Federal or state banking regulators may require an application or notice filing. Additionally, if the business will be run through a subsidiary of the bank or its holding company, the subsidiary will need to register as an investment advisor with the SEC or the state, depending on the amount of assets under management.