How To Gow Bionically vs. Oganically With An M&A Stategy An aria Case Study by Bent Bodeski, CEO, Savant capital management 2013 aria
Oveview: Achieving a healthy gowth ate means RIAs need to add top advisoy talent to develop business and ovesee key elationships. RIAs can acquie such advisos oganically (hiing o developing them) o bionically (patneing with key talent via meges and acquisitions). While both stategies have thei pluses and minuses, a bionic (inoganic) stategy has temendous upside potential and can be extemely effective in diving gowth. Howeve, choosing the wong mege patne o acquisition taget can deal you fim a cushing blow. KEY STRATEGY Bionic Gowth Ae you maintaining a 15% annual gowth ate? Doing so is citical. Absent healthy gowth, it is impossible to povide good value to you clients, you team and the communities you seve. Gowing equies developing top advisoy talent. In ou expeience doing this oganically is not easy. Thus, it can be moe efficient to go bionic and acquie o mege with anothe RIA to bing top talent to you fim. Key Takeaways: 1 Gowing you own advisoy talent is a good stategy but it takes a lot of time. Acquie o mege with anothe RIA to bing top talent to you fim. 2 Recuiting top quality advisos and expanding into new makets is difficult, expensive, isky and time consuming. 3 An efficient way to gow is by acquiing top talent via mege with anothe RIA. 4 Close alignment of cultue, values, philosophy and a mutual commitment to gowth helped us succeed in ou ecent M&A tansaction. OVERVIEW 2
Intoduction & Executive Summay: Registeed Investment Advisos (RIAs) may eventually plateau if they ely stictly on thei founding advisos to dive evenue gowth. This appoach may be a limiting scenaio fo you clients, you team o you fim. One appoach is to allow gowth to be maginal and go into havest mode to maximize cuent cash flow while accepting the inevitable decline/stagnation of evenue scenaio. Altenatively RIAs can dive evenue gowth by developing o ecuiting advisoy talent. Expeience tells us this is not easy. It is time consuming, expensive and isky. Altenatively RIAs can jumpstat the acquisition of top advisoy talent though meges o acquisitions. Afte oganically gowing to $2+ billion in AUM since ou inception in 1986, Savant Capital Management, ou Rockfod, IL based RIA, meged with The Monito Goup (TMG), a nealy $500 million RIA in McLean, VA. jumpstat gowth Gow you team While thee wee challenges (see Exhibit 1: Mege Related Challenges), the mege jumpstated ou gowth and povided an efficient way fo Savant to leveage its existing infastuctue and ente a new gowth maket. Most impotantly we found the mege was a vey efficient way to expand ou advisoy team by adding an entie team of seasoned advisoy pofessionals in a obust gowth maket. The main eason that the mege was a success was that the two fims had close alignment of cultue, values, investment and planning philosophy, and a commitment to gowth (see Exhibit 2: Savant s 16 Point Go/No-Go M&A Checklist). Challenge: Histoically Savant had gown 20%+ annually elying pimaily on ou foundes abilities to develop new business and the fim s ability to develop the talent needed to suppot this gowth. Howeve, ove time, we became a dominant advisoy fim in ou maket outside of Chicago, IL. At the same time ou foundes became inceasingly busy dealing with management concens and focusing on (continued on page 5) We found the mege was a vey efficient way to expand ou advisoy team by adding an entie team of seasoned advisoy pofessionals in a obust gowth maket. Intoduction 3
Exhibit 1: Mege Related Challenges 1. Meging two diffeent adviso compensation systems. While The Monito Goup advisos liked the additional upside inheent in Savant s compensation system, fo the fist time a significant pat of thei compensation was diectly coelated to new business development. This caused some stess fo ou newly meged advisoy team. 2. The powe in McLean, VA went out (big stom) fo thee days the weekend we had scheduled to integate technology platfoms. This was an unexpected cuveball. Close alignment of cultue, values, and philosophy is vital. 3. One lead adviso left to join a local competito just pio to the tansaction closing. This ceated some challenges in communicating with his clients, and ceated additional wok fo the emaining team. 4. Two key people had not signed non-compete/nonsolicitation ageements equiing us to scamble to entice these individuals to sign ou ageement pio to closing. 5. The Monito Goup clients needed time to come aound to the fact that they would benefit fom being pat of a much lage fim. About 3% of clients tansfeed thei assets elsewhee as esult of the mege. 6. Change is had. As such, the stess level was elevated fo seveal months following the closing fo both teams. Retained ove 97% of client elationships afte mege. 7. We communicated a lot with the new team. Still, we now ealize we should have communicated 5X moe. EXHIBIT 1 4
leadeship instead of evenue geneating activities. We needed to find new ways to gow, while tying to incease ou business value. Ou peliminay effots evolved aound thee key stategies: 1. Intenally developing talent. 2. Stating geen field offices in neaby communities. 3. Recuiting existing advisos (with books of business) to jumpstat ou sales effots and supplement founde led gowth. We needed to find new ways to gow, while tying to incease ou business value. Howeve, each of these stategies pesented thei own difficulties. Intenally developing talent has always been a stength. The advantage of this appoach is that it is the most pofitable and least isky appoach. Allowing young talent to gow up with you povides a slow bun method of developing talent to be effective at business development, the highest value activity in any business. Howeve, it is vey difficult to acceleate this pocess. It takes many yeas, lots of enegy and effective leadeship to oganically develop top talent. And thee could be the eality that talent you thought would stay on a steady gowth tajectoy, suddenly levels off o even leaves the fim. And while, even today, we still think talent development is the best long-tem gowth stategy, it poved to not be a high-octane (bionic) stategy. Evey new office we opened was a geen field oppotunity. We eithe elocated an existing adviso(s) to the new community o hied a new adviso to stat a new office fom scatch. The good news is that each new office has achieved the scale equied to be self-sustaining. Still, in etospect, we leaned that ceating a new office fom scatch is difficult, isky and expensive. The cost elated to funding a new office, one without significant initial evenue, is high. It also takes lots of management bandwidth and time to build a band, evenue and a positive eputation in each new community. It equies patience, commitment, and the willingness to accept nea tem losses fo longe tem potential. IDENTIFY CHALLENGES Stating geen field offices in neaby communities can be difficult, isky, and expensive. Recuiting existing advisos can be difficult. The thid stategy was ecuiting expeienced advisos with existing books of business. So fa, this stategy has been maginally successful at best. We leaned that advisos fom captive channels, such as wie houses, ae vey diffeent fom us. In addition, lage bokeages thow cazy money at advisos in the fom of ecuiting (continued on page 7) Challenge 5
Exhibit 2: Savant s 16 Point Go/No-Go M&A Checklist: Savant uses the following 16 questions to identify whethe an M&A patne is woth pusuing. These questions ae posed ealy on to detemine if we need to allocate the necessay esouces equied to pusue a given oppotunity. If any of the following answes ae No we poceed vey cautiously. Does the candidate s cultue align with and enhance ous? Is the candidate eventually willing to adopt the Savant band? Is the deal accetive to ou economics and does it einfoce ou long-tem gowth stategy? Does the candidate embace Savant s team appoach? Does the candidate fim and thei people shae ou coe values? Is the candidate eceptive to Savant s model and able to bing additional best pactices and capabilities? Will the deal impove liquidity possibilities fo all shaeholdes? Does the oppotunity enhance o compliment ou human capital needs? Does the deal benefit non-owne constituents (i.e. ou team, clients and community)? Would meging with this fim povide a significant gowth oppotunity in a cuent o a new maket? Does the taget s investment and planning philosophy match ou Evidence Based Investing appoach? Would we be excited to spend a lot of time with the key people in this fim? Does the oppotunity enable us to have fun while becoming an industy leade? Is the oppotunity in a desiable and gowth-oiented location? Is the M&A candidate attacted to Savant s Building Ideal Futues vision? Does the M&A candidate have a stong cultue of compliance to assuage any concens of egulatoy non-compliance o disciplinay issues that we would be equied to disclose? EXHIBIT 2 6
and etention bonuses (up to 300% of annual poduction). We have found that most of these advisos focus on the allue of shot-tem benefits. As such, so fa we have not been vey successful attacting these advisos. And, we have become somewhat esigned to this eality. Solution: Though we had achieved ove $2+ billion in assets ove 20+ yeas though oganic means, we did not feel that what got us hee would get us thee. Said diffeently, we needed to ceate a new appoach to gowth both in acquiing advisoy talent and moe efficiently moving into new high potential gowth makets. The stategy we took was to go Go Bionic. Savant Capital Management (2BB+), in Rockfod, IL and The Monito Goup (nealy 500MM), in McLean VA, ageed to mege effective 6/30/2012. The goal was to gow the combined fim aggessively fo the benefit of the clients, ou team and the communities we seve. In addition, The Monito Goup was able to addess thei succession planning needs, upgade thei technology platfom, and is now able to offe additional sevices like tust and 401(k) sevices (see Exhibit 3: Benefits of the Mege). None of the founding pincipals desied liquidity since we believed the dividend and potential gowth ate on Savant stock was highe than investing ou capital elsewhee. Instead we ceated a unique opeating ageement, capital stuctue and succession-planning platfom that allowed the founding shaeholdes to maintain thei equity and dividend even afte they eventually etie. Fo minoity shaeholdes we ceated a shae class that povided cetain potections and a liquidity mechanism that tigges when they each etiement o choose to leave the fim. This povided minoity shaeholdes confidence to own units in a closely held and contolled company that is oveseen by a boad of manages leveaging best-in-class copoate govenance (including using outside boad membes). None of the founding pincipals desied liquidity since we believed the dividend and potential gowth ate on Savant stock was highe than investing ou capital elsewhee. Solution 7
Exhibit 3: Benefits of the Mege Savant: The Monito Goup: 1. New office location in a high gowth maket. 1. Addessed succession planning challenges. 2. Six new Advisos and additional suppot staff. 3. Scale benefits elated to adding 500MM new AUM on Savant s existing platfom and infastuctue. 4. New capital stuctue that povides a way to offe oppotunity and owneship to minoity ownes and the next geneation of pofessionals. 5. Gained valuable M&A expeience. 6. Tansaction accetive to Savant valuation. 7. Gained advanced estate planning and othe niche planning expetise. 8. Raised Savant s visibility within the industy. 2. Ability to povide tust and 401(k) sevices to existing and new clients via Savant s platfom. 3. Enhanced technology platfom. 4. Access to Savant investment and planning specialists. 5. Tansaction accetive to TMG valuation. 6. Inceased ability to focus on business development, elationship management and advising clients. 7. Enhanced compensation oppotunity. 8. Ability to eliminate focus on nonadvisoy aeas like HR, compliance, technology. 9. A moe expeienced and specialized pofessional management team. EXHIBIT 3 8
Results: So fa, the combination has been a success. The combined fim etained ove 97% of client elationships and all of thei key advisos and team emain with Savant today. The speed of gowth in McLean (Savant East) has acceleated as thei team has been able to e-focus on sales, elationship management and mentoing young advisos. Ou McLean advisos now leveage Savant s maketing capabilities, technology and infastuctue. They no longe woy about things like compliance and HR. One of the most impotant easons fo ou success was the close cultual alignment of the fims. The coe values of the two fims (excellence, tustwothy, espect, faithful, lifetime leaning and gowth) lined up almost pefectly. The fims shaed a common investment and planning philosophy both fims believe in a passive investing, stategic asset allocation and povide compehensive integated wealth management. Of couse we hit some speed bumps. Next time we will slow the technology integation by a few weeks. In etospect, we would have spent a bit moe time building intenal elationships in the weeks leading up to and afte closing. This would have made the integation less stessful. The most exciting pat is that in one tansaction, Savant added 12 top team membes including 6 advisoy team membes, all eage to embace ou band (see Exhibit 4: Company Pofile Pe and Post-Mege). We gained new expetise in aeas like managing life tansition, advising eldely clients with dementia, tax pepaation and advanced estate planning. While we ve stuggled hiing top advisoy talent fo many yeas, and spent a lot of time and money opening new client offices, ou mege with The Monito Goup allowed us to instantly expand ou team and establish a pofitable beachhead in a high gowth maket. LESSON LEARNED building elationships Slow the technology integation a few weeks and spend moe time building intenal elationships. Results 9
Exhibit 4: Company Pofile Pe and Post-Mege savant tmg combined TODAY S FIRM at Mege on 6/30/2012 As of 9/30/2013 Total AUM $2,181,056,036 $469,455,000 $2,650,511,036 $3,388,096,890 Numbe of Clients 2,470 284 2,754 3,027 Numbe of Advisos 24 6 30 30 Numbe of Offices 8 2 9 9 Total Staff 72 12 84 90 Expected Gowth Rate 16% 9% 16% 16% Conclusion: Oganically developing you own talent, stating new offices and hiing seasoned advisos is often difficult, expensive and time consuming. Maintaining 15% annual healthy gowth is citical to the long-tem success of an RIA whethe you measue success in financial tems and/o by the value you povide clients and team. Meging with othe top RIAs can povide an excellent way to gow you talent pool and expand into new locations that can fuel sustainable, above aveage gowth. If this appoach seems like a shot cut, it is anything but. Conside the isks to you business if executed on pooly. To mitigate such isks, make sue M&A patnes ae well aligned with you copoate values, have compatible goals, and ae philosophically aligned. Lean fom the expeiences of those who have gone though it. CLOSING 10
About Savant Capital Management: Savant Capital Management offes investment management, financial planning, integated wealth management, tax and family office sevices to individuals, tust funds, etiement plans and non-pofit oganizations. Savant has egulaly eceived local and national ecognition. Fo the past seven yeas Savant has been named by Baon s magazine as one of the 100 Best Independent Financial Advisos in the United States. Fo the last 11 yeas Savant has eaned a place on the Bloombeg/Wealth Manage/AdvisoOne Top Dog list. In addition, Savant has been included on top adviso lists in InvestmentNews (one of the 50 Lagest Wealth Management Fims in the Nation), Financial Adviso Magazine (A Top-Gowing Independent RIA), BusinessWeek (Most Expeienced RIA List), Chicago Magazine (#1 independent financial adviso in the Chicago aea) and Fobes (Top 50 Registeed Investment Adviso). Fo moe infomation on Savant Capital Management, log on to www.savantcapital.com. About aria aria, the alliance fo RIAs, is a think tank study goup composed of six elite RIA fims that collectively manage moe than $20 billion in client assets, and Adviso Gowth Stategies, a leading consulting fim seving the wealth management industy. The goup offes insight fo advisos consideing ways to enhance thei fims entepise value. Membes include Bent Bodeski, CEO of Savant Capital; John Buns, Pincipal at Exencial Wealth Advisos; Ron Cason, CEO of Cason Wealth Management Goup; Jeff Concepcion, CEO of Statos Wealth Patnes; Matt Coope, Pesident of Beacon Pointe Advisos; Neal Simon, CEO of Highline Wealth Management; and John Fuey, Pincipal of Adviso Gowth Stategies, LLC. The goup meets egulaly, eleasing thought leadeship pieces of inteest to both independent and wiehouse advisos inteested in exploing long-tem gowth stategies. On the Web at: www.alliancefoias.com D isclosue: Savant Capital Management is a Registeed Investment Adviso. Savant s maketing mateial should not be constued by any existing o pospective client as a guaantee that they will expeience a cetain level of esults if they engage the Adviso s sevices and includes lists o ankings published by magazines and othe souces which ae geneally based exclusively on infomation pepaed and submitted by the ecognized Adviso. To obtain a copy of Savant s disclosue bochue, which contains impotant infomation on sevices, fees, investment methodology, conflicts of inteest and elated infomation, please visit www.adviseinfo.sec.gov CLOSING 11