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Considering Consolidation? Here’s Some Advice

Managing a Practice

Consolidating or remaining independent each have their pros and cons, but it is especially important to understand the challenges and opportunities before going down that path, speakers at an April 4 workshop session at the NAPA 401(k) Summit advised.

Moderator Melissa Cowan of Melissa Cowan Consulting, LLC, and Chad Larsen, Retirement Practice Leader at HUB Retirement & Private Wealth, addressed various factors in the decision-making process, including what factors to consider and what you might gain from consolidation versus being independent, as well as long-term strategies you should be thinking about for your practice. 

Larsen noted that he started his practice more than 30 years ago when it was just himself. But then it grew and evolved, and with that came additional responsibilities to both his team but also to his clients. As such, he pointed to the importance of having an initial succession plan in place in case something happens to a team member. “I don't think it’s ever too early to start thinking about what happens next. You know, anything can happen tomorrow; anything can happen to any one of us at any time and that impacts not only us, but also our teams and everybody else that’s part of our team,” Larsen explained. 

But it doesn’t mean that the succession plan can’t be adjusted down the road, Cowan observed. For Larsen, his initial plan did change when they started looking at acquisitions and what other options were out there and decided that the opportunity was right. (Larsen’s firm, MRP, was acquired by Hub International in September 2019). 

“I just don't think you can be in this business and not know exactly what's happening. And I've always taken the approach that we know the market is going to change. We know our business is going to change and I’ve always had the feeling that I wanted to help create that change rather than respond to it,” Larsen described as part of what went into his decision-making process. 

Evolving Industry

When asked by Cowan to list some of the biggest factors that prompted him to explore other options, Larsen said that the market and industry had changed, and some of those changes added additional stresses. 

Among those were the possibility of getting hit with a fiduciary breach lawsuit. “We’ve always considered ourselves as doing everything possible to always meet all of those responsibilities, but the idea of something like that happening—even though you have all your insurance and things to deal with that—the risk that comes with that was something that weighed on me,” Larsen noted. 

At the same time, however, a lot of large clients and advisory firms can also be targets, he observed. At the end of the day, you’re going to take on different risks no matter what you do, but mitigating those risks is key, he says. 

Opportunities for Growth

Additional factors include adding pieces to the business, such as wealth management and other opportunities to expand your base. “When we started with retirement plans, I always said we wouldn’t do wealth management,” Larsen began. “But we started and it has been phenomenally successful, even though that’s not where I spend my time.” And some clients are quite happy to have access to additional services. 

When asked about some of his experiences with acquisitions, Larsen said he has learned that there are a lot of good practitioners and firms out there that take great care of their clients, but some fail to see the big picture. He explained that he has faced situations where practitioners do not want to give up any revenue when considering coming under an umbrella of a bigger organization that has infrastructure and compliance, investment and service teams in place. “I think it’s important to uncover that on the front end if somebody really wants to build and take things off their plate so they can continue to grow—that’s the model that works, I think,” he noted. 

Turning to the pros and cons, among the gains when you consolidate are financial security, additional resources, regulatory support, reduced liability and lower infrastructure costs, Cowan and Larsen explained. In contrast, when you remain independent, you maintain full decision-making, branding and marketing flexibility, culture control, reduced reputational risk and infrastructure decisions.   

Impact on Clients

In an acquisition, one of the most common questions is who is going to be making the decisions for clients going forward. That decision-making is a big issue, particularly for clients who want to know whether the firm they had been working with will still be calling the shots—or whether it will be somebody else who is remote. They also want to know if their fees will change. The reality is that clients are going to choose, and any acquisition must be done with the client in mind and who they want to work with, he noted. 

What about the fear that you sell your practice, but a couple of years down the road you’re not happy? Larsen suggests that you have to go into it with the mindset that it’s the right fit. “If it makes sense, if we’re going to do this, I’m not going to second-guess myself—and part of that is having realistic expectations,” he explained. 

In fact, he suggests to never go into an acquisition thinking that nothing is going to change. “That’s just unrealistic. So it’s, what is really going to change; what change am I comfortable with; and can our team adapt,” Larsen explained.