If you are considering buying another advisor’s book or selling your own and don’t know where to start, Lloyd Sprague has the experience to offer guidance. An advisor with True Wealth Advisors, an LPL firm based in Colorado, he has acquired seven practices since joining the practice in 2017.

This type of inorganic growth was no accident. In fact, Sprague spotted an opportunity to grow by acquiring other firms, which helped him make the decision to start a second career as an advisor after two decades as a wholesaler. Research told him that 40% of advisors would retire in the next 15 years and that LPL had around 560 advisors in Colorado at the time with an average age in their 60s.

Inorganic growth continues to be an important component of True Wealth’s strategy. The firm has acquired 20 other practices, and as Sprague says, “I’m always on the lookout for something.” Here is what he has learned about how to find a book that makes sense for you to buy, engage with advisors who are selling, shepherd clients through the transition and position your own practice for acquisition.

What to look for in an acquisition target 

Opposites may attract in some cases, but not when it comes to financial advisory practices. “Look into someone who has a similar service model,” Sprague recommends. The more core similarities there are between your practice and the one you’re acquiring, the smoother the integration of your new clients will be.

Some service models are too different to be compatible, Sprague says. “If you're in an automated, fee-based business, and you have a lot of high-maintenance or highly engaged clients who want to talk about individual stocks or annuities or individual bonds, the best thing to do is introduce them to someone who would want to do that type of business.” Other differences might not be dealbreakers but should be addressed early. “Sometimes they meet quarterly. That would not work in our model,” he says. “You want to make sure that, if that's their service model, they would be comfortable moving to semiannual.”

Sprague’s team tries to narrow down the field of potential acquisition targets from the start. “Years ago, we came up with a letter that says, ‘Here's what we're looking for, here's the type of practice we're looking for, here's the technology we use and here's the client experience,’” he says. “We try to give them a quick, ‘Here's what it would be like if you want to even engage in a phone call.’” This requires defining your ideal client and value proposition.

He also recommends staying within your own firm, which is what he has tried to do with LPL. “We did one [acquisition] with another broker-dealer, and it was very clunky because the clients don't know what a broker-dealer or a custodian is,” he explains. “I'd introduce myself, ‘Hey, this is Lloyd from LPL.’ And they said, ‘Who's LPL? Who's my old broker-dealer? Who are you?’”

You might already be connected to people who can play the matchmaker role for you. As a former wholesaler, Sprague recommends looking there for connections who know your territory. “I would ask every wholesaler that you work with, ‘Who do you know that might be looking at retiring in the next few years?’” 

Acquisitions from start to finish 

For Sprague, the acquisition process can take years. That’s because three essential components of an acquisition are best done over a long period of time:

 

• Building trust. In Sprague’s experience, it takes “anywhere from a year to five years to get someone comfortable enough in order to transfer their book of business to you.”
• Transitioning clients. “Most advisors don't want to leave the business that quickly,” he notes. “They want a long transition to make sure their clients are comfortable, that the value of their practice is preserved and that they can go into retirement or their next stage without worrying about phone calls from their clients.”
• Giving the selling advisor an offramp. Even after another practice agrees to be acquired, Sprague and his team continue to proceed with caution. They buy the book one tranche at a time, over multiple years. Sprague explains, “The first tranche is going to be the bottom third of their book. It's going to be either their least desirable clients or smaller clients. That gives them the ability to see how that transition occurs.” He buys the second tranche the next year and the remaining clients in the third year.

The more time the process takes, the more time the selling advisor has to make sure this is the exit they want — or to back out if it’s not. “If they change their mind during the process, they still have control of their clients in their book,” he says. “The worst thing you could do is purchase from someone and then have them change their mind or want to reenter the business.”

Given how long acquisitions can and should take, Sprague is playing the long game. He still regularly takes other advisors out for breakfast or lunch on a weekly basis, “planting seeds that may not bloom for four, five, six years.” Study groups are another way to build long-term relationships with like-minded advisors.

What a practice is worth 

In the acquisitions Sprague’s team has been making and observing, they’ve seen multiples ranging between one to two times revenue. These multiples are sometimes much lower than what selling advisors expect. “When you read some of these articles, you see these huge multiples, and some of these roll-ups are paying quite a bit of money for these books,” Sprague explains. Those higher multiples typically apply to fee-based businesses that don’t offer complex products like annuities and 529s — not to most typical practices. But the headlines create inflated expectations on the part of selling advisors. “It's just like when you go and put your house on homes.com or Zillow, you want that number that pops up, even if that is not an accurate number.”

Besides product mix, age is another significant factor in valuing a practice. “One of the books that we did not end up getting, the average age was in the mid to high 70s,” he recalls. But having next-generation clients is a mitigating factor. If the older clients’ children are also clients, that makes the book a more attractive acquisition target.

Sprague has found that targeting smaller practices can be advantageous from a risk management perspective. “I think that the smaller books are easier, because it won’t hurt you as bad if we do get a downturn,” he says. “Buying 25 or 50 million is a lot easier to absorb should we go into a correction mode than it is once you get over 100 million.”

How to transition and retain new clients 

Sprague has found that three tactics go a long way in providing a smooth transition for new clients and making it more likely that they stay with his practice:

 

• Make the selling advisor a client. Whenever he buys another practice, Sprague asks the selling advisors to keep their own accounts with him. “I want them to say, ‘This was the right person for me. I trust them enough to have my assets, then you should trust them to have yours,’” he explains. “If it's good enough for them, it's good enough for their client.”
• Be flexible with your service matrix. The True Wealth team is adaptable when it comes to what level of service each client receives, for what fees and from which members of the team. No matter how similar two practices are, there are inevitably some differences in client experience. “You might have someone who negotiated a better fee," Sprague says. “You have to make that decision. Do I keep that client at a below market fee in order to keep the relationship? Or maybe that becomes someone for someone else on your team.”
• Communicate early and often with clients. At the beginning of the process, the True Wealth team sends a letter to clients of the acquired practice. It explains that the two practices are partnering. Sprague’s team then starts meeting with the larger clients. After meeting, the team adds the client to True Wealth’s monthly newsletter. They also create other touchpoints, including invitations to events, fridge magnets and even Thanksgiving cards. Your Christmas card will get buried with a hundred others, Sprague notes. But how many people send Thanksgiving cards?
  

“We want it to be like that old adage of boiling the frog. We don't want them to feel anything,” says Sprague. 

Advice for advisors who might want to sell their practice 

Sprague says every advisor should do two things, not just when they decide they want to be acquired.

First, “get a valuation,” he insists. “Just get it right now. Even if you're 10 years out, you should know what the present value of your book is and put that in your file.”

A valuation doesn’t just tell you how much your book is worth. It can also indirectly tell you the specific steps you can take to improve its value in the eyes of an acquirer. “They’ll benchmark you to other people with a similar size book, with a similar mix of business. So you have a little bit of context to say, this has been the multiple, and these have been the reasons.”

The second thing he recommends is succession planning. A succession plan is more than a name on a piece of paper. Having an internal successor in mind is good, but that can also fall through.  Advisors who follow a roadmap for succession planning know there are many steps that can be made over time.

Sprague’s recommendation is to find an advisor you trust who would be willing to purchase your book. Have an informal arrangement in which that advisor says, “Hey, God forbid something happens, I want first right of refusal when you go to sell your book. So come to me first.” Sprague says to set up this kind of arrangement with multiple advisors. “That creates your runway for the next five or 10 years.” 

In the seven acquisitions Sprague has made, none of them have seen selling advisors change their mind and reenter the industry. All of them have seen client retention rates above 90%. He attributes the success of his inorganic growth strategy to a heavy dose of patience. Patiently planting seeds, building long-term relationships with other advisors, being extremely selective with opportunities and transitioning new clients deliberately and slowly.

Advisors who are willing to be patient can have a better chance at meeting their own goals, the goals of the selling advisors and — ultimately — the goals of the clients they serve.