The Transition Assistance Bidding War

“Such and such a firm spends $20-30M on transition assistance.”

It’s a headline we all read more often these days. What do you assume when you read it? That a firm spent the capital to expand and acquire a substantial amount of new AUM?

Well, in an M&A-happy environment, we’ve officially seen the other shoe drop. Firms are using millions earmarked for “transition assistance” to bolster advisor retention. In a sense, it’s a very predictable reaction when your top advisors are getting courted from every side.

With the transition vs. retention bidding war well underway, here are a few trailing consequences I’m watching closely.

Good News for Top Advisors

I’ve never met a top advisor who would resent several hundred thousand or more as a “loyalty bonus”. If you’re entrepreneurially minded, I’m sure you have more ideas than capital. An infusion of cash is absolutely a win to help you climb your next mountain.

From recruiting new advisors to marketing campaigns to technology upgrades, retention money is a good thing for top advisors.

Even if you have no interest in transitioning, it suddenly seems worthwhile to entertain conversations…

Bad News for Some Firms

Now, there has always been a bidding war over top advisors. It’s common to get solicitations from multiple suitors attempting to lure you away. The newer wrinkle is that current firms are increasingly expected to join the bidding war.

This isn’t just happening because advisors are getting more and more offers. It happens because advisors see millions invested in M&A activity at the expense of investments in loyal advisors. It’s a classic, well-founded case of, “What about us?”

Why is this bad news for some firms? A few larger firms who are flush with cash can play this game. They have the funds to acquire and retain. 

But smaller firms who have leaned heavily into M&A as their primary growth strategy? Many of these firms don’t have the capital to compete on both fronts.

Acquisitions? Retention? Platform and culture investments? I’m seeing a lot of firms that can hardly manage two of these, let alone all three.

Accelerating the Great Consolidation

When business becomes a bidding war, it by default favors the bigger players. I absolutely do see this defensive bidding trend favoring the big names in our industry. I’ll refrain from commenting on if I think this is good or bad–it can go either way.

What this does tell me though is that for small to midsize firms like RIAs and OSJs, your biggest differentiator needs to be your culture.

Transition assistance can be a value add, but it’s a dangerous game to make it the center of your pitch. If it is, there’s always a bigger fish.

And to the advisor who is courting transition assistance–to leave or to stay–be wary of firms getting carried away in the bidding war. Too much competition can undercut the platform on which you actually run your business. 

No cause to panic but keep your eyes open. The best time to consider your options is well before you need to choose.

What I would argue is there's only a handful of firms out there that can pay a good amount of money upfront transition assistance and give you a check or a wire for you to port your business from point A to point B, which is their firm. But then you have to ask yourself, if all this money is being spent on recruiting and acquisition, how's everything else getting serviced?

How's it getting fixed? Where are the investments into everything else? Are you enhancing my service? Are you enhancing my compliance? Are you getting access to better technology? So you're spending all this money on recruiting to keep your thing afloat, but you're not improving the lives of the existing users, like your existing clients. And so it's a really difficult environment. So a lot of times I find it interesting that even if, say, a firm that's offering a lot of money doesn't win a deal, they can drive up the acquisition cost of another broker dealer or an RIA. And so even though they lost, they won, right?

Because this firm can afford to pay that money. This firm can't. And so naturally there's just all this consolidation because you're continuing to put firms out of business. Because they have to spend that kind of money to retain talent or to bring talent on. And I also do hear from existing advisors that I work with that say my firm just bought out this firm or, or this OSJ left my broker dealer and these advisors got 15, 20 percent to just simply do nothing and stay.

On a million dollars of revenue, they got 200 grand just to stay.  And so you're seeing firms pay to keep talent, pay to keep them from leaving, but you're also seeing firms pay money to squash their competition.