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Managing Your Practice
Future Proofing your Practice: How to Prepare for Succession and Transactions in a Period of Growth
00:43:46
David DeVoe, founder of DeVoe & Co., appropriately nicknamed the "RIA M&A Guru," has spent 15 years helping advisors buy, sell, and merge their firms. With so much to consider in a deal, how are advisors avoiding analysis paralysis when...
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Welcome to Dimensional Fund Advisors Managing youg Practice Podcast. This podcast series is dedicated to helping financial professionals make the critical business decisions successful firms face every day in key areas such as driving growth, building enterprise value, and the client experience.
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Hi everyone. Thank you for joining us today. My name is Kathryn Williams and I am head of Practice Management here at Dimensional. And we are going to talk about a subject that I have the pleasure of spending a lot of time working with advisors really around the globe as they think about the future of their business. So what does M and A look like? What does a potential M and A strategy look like? How does that relate to their own succession planning and where really the legacy they want for their business? And we're going to unpack that today and I'm really excited to have a fantastic guest with us to help us do that. We know from our Global Advisor study that when we look at high performing firms, a third of their assets are coming from some sort of inorganic activity. So even if you're thinking about just future growth, forget succession for a moment or even finding that next generation of talent. We know that growing your business is also a big driver for M and A activity and I'm excited to talk a little bit about that as well. So joining me today is Dave DeVoe, who is the founder and CEO of DeVoe and Company. Dave, it's great to have you with us today.
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It's a pleasure. Thanks for having me.
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I never want to assume that everyone listening, that there might be someone listening who actually does not know who you are. I know it's hard to imagine.
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Not hard for me to imagine, no.
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You've been such a, such a force in this industry for so long, starting the DeVoe & Co. Almost 15 years ago with a very specific focus on helping RIAs. And so really looking forward to hearing your perspective. Uh, we're just on the other side of 2023. We're in well into a new year here. What does all that look like? And I love that you know, even just as a business owner yourself, what that evolution has looked like. What drew you to creating devoe and Co? We're going to talk about that, but I definitely want to make sure that our listeners know a little bit about you. I did a little sleuthing, I talked to a couple folks in your org. Does that make you nervous when I say that?
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Awesome.
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So for those of you who may not know, one of the things I really appreciate is Dave is all about like really great walk up music. Music. If you ever have an opportunity to go to any of their conferences or see them at a conference. I love that. You absolutely lean towards that. Belbiv devoe, Metallica. Like, that's. I love that and that. And that's great music.
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I should give the team credit because I say it's important. But then they surprise me with Metallica in Devo and Belle Biv DeVoe. So, yeah, we got a creative bunch here, and they make it fun, but. But often that look of surprise on my face is very genuine. I didn't know that song was about to come on.
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And many might not know that you. I mean, you have been an entrepreneur for a very long time, and one of your first gigs was starting a clothing company that specialized in surf pants. Yeah, I don't know if that's something to bring back or not. We could talk about that maybe on another podcast, but that's fantastic.
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This is great.
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How old were you when you. When you did that?
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Yeah. Yeah. So this is fantastic. You did do your research. We know each other well. But this is all new stuff. This is neat. So when I was a senior, I was a senior at UC Berkeley, and I was a rudderless directionalist guy trying to figure it out, a liberal arts major, no interest or. Or curiosity about business. And I accidentally started a clothing company. My girlfriend at the time, I played in bands and stuff. And, you know, I had borrowed a pair of pants to play on stage as these funky baggy surf pants. Little cooler than MC Hammer, but kind of that vibe. And then she surprised me. She made me two pair, and everywhere I wore them, people were like, wow, those are so cool. I mean, fast forward. I was in a surf shop and in Santa Barbara. The owner started chatting with me and said, where'd you get those? I said, I have my own company. After like five minutes, he said, okay, I don't think you have your own company, but I'm gonna give you a po for 10 pairs. So I started making these in the basement of the house I was living in, and before I knew it, I was selling them to surf shops and three Nordstrom locations. They re reordered. So that was my introduction to business. Yeah. So you went back in the archive. That's awesome.
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It's really important, I think, to think about this idea of you yourself. You're a business owner, you're an entrepreneur. You really do understand the leaders and business owners that you're working with and that make up so much of our industry for sure. So. And, you know, have a little fun along the way too.
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From there. Started my clothing company. I ran a couple small companies. They were tiny. And I realized I didn't know what I was doing. So I went back to school, got an MBA at Cornell, and then I joined the business strategy group at American Express, which was like 30x McKinsey folks. And they just sort of created this not only strategic thinking, but analytical rigor and focus on excellence, which is not only my DNA, but now the DNA of the company today, but American Express for a couple of years. Then I joined Schwab. By the time I launched Devone company, I had not only done the business case, I was in the strategy group at Schwab, but I had brand Schwab's M and A platform for eight and a half years. So, you know, at the time, I'm not a corporate guy. So I was like, wow, running companies is fun and cool and. And I saw some space, Catherine, you know Mark to Bergin, who's just an icon for me, a mentor. So. And I really admire and has really done so much good for this space. But Mark had shifted and he was running Bergin, another custodian. So I saw some white space there. There's some investment bankers, but no one was really serving that, you know, 302. 300 million up to 2, 3 billion plus. They were. No one's serving them extremely well. So, you know, I was like, wow, let's go launch this. I already had a reputation as an M and a guy in the industry, but most people didn't realize I'm like a consultant by training. So I thought, wow, this is really neat. I'll go launch this thing. And I felt like the REA community not only needed it, but would support this. And, and you know, that was how we got started coming up on 15 years ago.
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And it feels like I've been around as long as you, maybe even a little bit longer. And I feel like this idea of hitting that billion dollar mark even 15 years ago was rare air, so to speak. And it's still, I would say, hard to do. That's still a milestone. I don't think we should ever overlook that as big as firms are getting these days. But what did that Marketplace look like 15 years ago? I know we're going to fast forward here and spend some time on the future.
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Yeah, yeah. So, you know, if you go back 20 years or so, I was at Schwab. That business case that I drafted was because, you know, this major custodian was losing a lot of their largest clients. Again, $1 billion was a big deal. Back then, there were 75 firms in the industry that had a billion. So they were losing these big firms to banks, the Wachovia, the E Trades, the Mellon, all these firms were these banks and were acquiring a lot of them and they took the assets and put it on their platform. So custodian was like, wow, that's not great. But also, as, or more importantly, saw this emerging pain, point of succession, planning and lack thereof, something you and I are very passionate about trying to, trying to get the industry to solve. But also M and A was just really starting to get some activity. So back then, $1 billion was a huge deal. Today, $1 billion is a huge deal for any firm that crosses that. But there's three or four or 500 now I think there's 480 that, that cross that in 2023, or a total of, of that amount. And it's interesting too, Catherine, because going back 20 years, you know, I'd be at an event and back then I was up a little later than I am now, and I might be at the bar at maybe 1am and there'd almost be the swagger of folks that had a billion or 2 billion, not only passionate about staying independent, never wanted to sell to a bank or so on, but a certain swagger that existed where today I have firms that have 3 or 4 billion and they're looking over their shoulder. They're like, wow, Dave, we only have 6 billion. Can we really compete in the future? It's an evolving competitive landscape. Competitive in a constructive way. We can talk more about that or not. But the evolution is accelerating with the consolidators and these meta firms that have entered the space. The ground is shifting as we're in this industry right now.
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As a business owner and a business leader, what have you learned the most? Maybe about yourself or about the business? In the last 15 years, it's been.
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Fun to grow the business. We started, I think, 13, maybe 14 years ago. It started with just me. We're now bumping up against 25 people. I've joked that, you know, for a while it was like every year I'm running a new and different business. It's just bigger and bigger. The challenges are, are more interesting. You know, culture is something we might touch on as we talk about M and A. But I've found, you know, an interesting challenge because I'm, I'm a nerd and I can solve a lot of things like, hey, how can we grow and how do we do this? And what lines of business should we expand and, you know, love doing that stuff. But what is an interesting, curious challenge that, you know, at least I haven't found a book that. That yields it is like, how do you maintain the culture in a constructive way? And I'll be totally blunt on the friction point that I have. My job is to optimize and maintain the excellence that we have. Excellence is easy when it's one person.
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Right.
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Excellence is pretty good when you got five people that are working wired that way over time. And, you know, we have just this rockstar lineup. I mean, check out our team on our website. These are just people that are so good at what they do. But, you know, being a consultant, being an investment banker, you have to be the smartest person in the room. And not. Not just smart like what's happening or iq, like smart on our clients in the detail. Like, if you're in a big company, you can rely or say, hey, the analyst knows that, et cetera. I'm like, hey, MDs, managing directors, like, you need to know what the details of their valuation or, you know, how much they're spending on marketing or this or that. So I think the challenge that I've had is how do I be this positive force that I love to be in the industry as well as the company, but also be a sergeant at arms.
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Yeah.
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And be like, hey, guys, process, process, process. Whoops, Hate. A sec. Wait a sec. There's a. You know, you rounded up there where you shouldn't have, or, or gee, do it this way. So that's a challenge that I have that I expect so many of my peers that are running these 200 or 2 billion or $20 billion IRAs are faced with. How do you maintain this, this culture as the company gets bigger and bigger?
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And I think for a while, there used to be a lot of chatter on that culture piece that it's a negative if you. If your culture changes, right. If it changes because you conducted a transaction, if it changes because you just simply, as you said, went from five people to 15 people to 50 people. But I think actually your culture changing in the form of evolution is not a bad thing. And really reframing that, we certainly do that with a lot of the advisors we talk with that in fact, it should change. I'd be a little worried if your culture really did not change at all, because that could imply that it's anchored around an individual too much or the business itself isn't moving forward.
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Catherine, it's key what you're talking about here, because we often hear that you know, with mergers and acquisitions, gee, our culture is so great, I don't want to change it, you know, or this, this calcification of what that culture should be, that's an indicator of a culture or a characteristic of that CEO that is inflexible, not able to evolve, et cetera. So I think, you know, part of our job is to, to be a constructive thought partner and, you know, provocative with our clients and say in a non confrontational way. Does that make sense not to want to change your culture? That also almost is like a lack of inclusion. Like you want your people who you hire and you think are wonderful and great and have these great ideas to have their own fingerprints on it. We update our vision, mission, values, principles of the firm, you know, or at least review them every two years or so. Literally, like Carrie on our team is like attention to detail that really captures the way we operate here. It's really not just attention to detail throwaway, but it's points of precision. So things like that, you want to make sure, ideally you have a culture in an organization that wants to maintain those core underpinnings or the foundational elements. You don't want to be changing your mission or vision on a, on an ongoing basis. But that culture should be flexi and shifting and sometimes the CEO's job is to shift it back in another direction. But I love the fact you brought this up. Really important stuff.
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Let's talk a little bit about 2023, maybe even dipping a little bit into 2022. Certainly from a data perspective, you and your team closely examine what's happening in the marketplace and what's driving activity. What stands out to you for 2023 in particular.
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So as many of your listeners probably know, you know, we've had a lot of M and A momentum in this industry. A matter of, in fact, you know, 10 successive record years of M and A activity, just record years every single year. So this upward momentum for over a dozen record years, for 10, and we actually had a down year, 2023 was a drop we saw. It wasn't a massive drop, it was 5%. Which is newsworthy, right? This upward momentum has not only you know, slowed or flattened it decline, but the decline is, is not material per se. Right. The way I talk about it is like, hey, there is a wave of M and A activity that's been flowing across this industry and likely will flow for years to come. So that wave that's flowing through, you know, guess what? In 2023, it's a little lower than Last year. But you still look at the magnitude 250 transactions. This is a very healthy, not just healthy active, but right now I think it's healthy the amount of buyers and sellers and the types of transactions that are happening. But yeah, it is newsworthy that, you know, we pause to catch our breath first year and probably a dozen or more years of upward momentum and the first non record year in quite some time.
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And I think something that you noted at one point is that it was still very much a seller's market. We often talk about, is it a buyer's market, Seller's market, We can sort of dissect that a little bit. But in terms of where the increase entrance and activity is happening, if I recall correctly, your data indicated that the number of sellers increasing is somewhere 230 plus percent versus maybe around 75% of an increase for the buyers that are coming into the space over the last five years. Yeah, yeah, for the last five years. So as you think about even just as we ended 2023, does that represent kind of what you saw happening over the last 12, 24 months?
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Thinking through a couple things, you know, seller's market versus buyer's market, you know, sometimes there's this illusion or even delusion that hey, there's, there's 50 buyers for every seller, you know, and it's tulips like back in the 1800s and Netherlands. And I'm like, you know, the buyers are pretty sophisticated. You know, today it's not like the value of a tulip or gee, there's a lot of buy. And I'd also argue, as you've heard me on stage say, hey, you know, one is to say you're a buyer and raise your hand. Another one's like, all right, have you done a deal or not? So yeah, I think, you know, as you alluded to, there's not 50 buyers to every seller. I think we had something like 87 buyers last year where we had 250 sellers in the year before as well. Now one could counterpoint and say, all right, Dave, we're not talking about a seller's versus buyers. The reality is valuations are up and that sounds like a seller's market. And I would say emphatically, yeah, 100% valuations. And I can nerd out and go back a couple of decades to the whole lifecycle of them, but probably two and a half, maybe three years ago now, valuations for the rea industry, relative valuations hit their all time high and with good reason. Because today's buyers they're run by sophisticated management teams. You know, they're backed by private equity or other, other sources of capital that give them, you know, lots of capital to do great things. Not only buy firms, but spend 10 or $20 million on marketing. You know, like build out a technology stack that is, you know, game changing for a lot of folks that are so, you know, these sophisticated teams with economic backing that are also, you know, thinking strategically about the future of the industry. They have differentiated business models and it's not just you're going to go sell to anyone to have the same experience, they're going to have a completely different exception experience if you sell to one type of firm versus another. So, you know, good news, valuations are high. That's good, great for anyone who's selling. They're also justified. Back in 2008, if we had this conversation the first couple of months, I'd say hey, there's a bubble like these are inappropriately high. The buyers are making a poor judgment and they will regret these deals. And many of them did. Today's buyers, when they make an acquisition, they can typically these meta reas, you know, these, these, there's about two dozen, you know, not only large firms but firms that are sophisticated management team backed by private equity doing things very thoughtfully. We can talk more about that. These meta firms when they make an acquisition can either make that acquired firm go grow faster or they can make it more profitable or both. And if you can buy a firm and put some magic dust on it and make it more profitable or grow faster, you can, you know, pay more. So it's right now it's a healthy dynamic. Despite these all time high in valuations are justifiable for the right buyer.
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What do you see as sort of being maybe one of the sort of the one or two blind spots in those businesses that if someone's really wanting to position their business to get premium valuation, what would you say? What do you typically see as being and this is, you know, creates an opportunity for the buyer, but for the sellers listening. How would you answer that question?
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Yeah, yeah. So you know, a couple layers to it if you have a longer timeframe. And fortunately I think over the last 20 years I've seen that the timeframe for advisors, as they think about selling their firm shift in a very positive direction. They're thinking further out. Most are now selling five years before they plan to retire, which is good for everyone. And if you're planning to sell for a couple years before you sell, that also gives you the opportunity to you know, optimize what you're doing. When I bought my first daos, my dad's like, all right, rip up the carpet, paint this thing, you know, enjoy it while you live in it. But the last thing you want to do is go on, on the market with some shag carpet, etc. I'd say ideally you have that time zone and if so, I'd say focus on growth. You know, I'll stay off my rift. But we have the best business model to serve the US investing public in this industry. We're fiduciaries. We're put their needs worth first. We do it better than anyone else. So for this industry, this community to be growing at 2 or 3 or 4 or even 5%, I think it's tragic. Like we're not investing the way we should. So in either case, you know, you're a seller, you're thinking about selling, you got a couple years really. Your ability to make your firm have sustainable, strong growth is the most sensitive factor. For every 1% faster that you grow, you know, on a sustained basis, the value of your firm will increase about 6 or 7%. And you know, some people are like, oh, Dave, so you mean if we grow 3% faster, then we're going to get like 18 to 20% more? And I'm like, yeah, if you can clearly justify that and you have a track record, buyers will pay 20% more for your firm. So, you know, that's so important. But the magic wands, that ability to grow and demonstrate, you know, sustainable growth, really important, you know, optimize profitability of the firm. And by that I don't mean maximize. Sometimes sellers come to us and they're like, let's sell. This is Great. We have 65% margins. This is going to be wonderful. We're like, yeah, so buyers are going to say, all right, you need three more people. And you know, this investment here, so you know, growth and profitability are probably the two most sensitive factors.
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I appreciate you saying that. And we noticed in our Global Advisor study last year that when we look specifically at high performing firms, which is a very specific criteria that we apply, they are reinvesting in their businesses at a greater rate than the other firms. In our study, it's north of 65%. I want to say that they're putting really high. Right. Like it's which we. That has not always been the case. And so, um. And that's not a magic bullet, I think it for sure as we're talking here. But it is interesting that we're seeing a higher sort of reinvestment in those businesses and interested to see how that plays out over the coming years. So when you think about this area of private equity capital partners, they're no longer, I would say, the new kid on the block, so to speak. We'll keep the music, musical references going here. You know, obviously, I think there's still a little skepticism. I certainly take phone calls from advisors and say, look, I'm interested in selling, but I do not want to talk to someone if they've got private equity, private capital in play. We really try hard to help them talk. Just talk through that. What is that? Why is that? But what, what do you, what's your perception? What, what has been the impact of that on the industry? And as we make the turn here into the next couple of years, what stands out to you in terms of their role and impact?
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Yeah, yeah, I think, you know, at a high level. And it's good to, you know, you're being a great thought partner to those folks. Like, okay, tell me why. There's no re. There's no wrong answer. And people got to be genuine and authentic and do what's best for them. But sometimes, you know, why is that and challenging people to think through it? I mean, a couple thoughts and I have no skin in the game here. Private equity to date has behaved pretty darn well. You know, it's been pretty good. However, you know, there's certain industries where there's no growth. I guess we're on the borderline of that. But, you know, you guys know what I'm saying? Where, where, you know, private equity coming in, they have to behave differently depending on the dynamics of the industry. And this is an industry that has growth and the potential for high growth. The firms they invest in grow extremely quickly, clearly or inorganically, in some cases organically. And they're going to do more to improve that. But the opportunity is huge. So, you know, this is an industry where that growth has that potential. Talent is critical for that growth. So when they're acquiring firms, the biggest fear is like, hey, I'm going to sell and chainsaw Al if I'm dating myself is going to roll in here and start cutting headcount and put on a ton of debt and make this a blow. A suboptimal organization. It's not the case when you're acquiring firms. Sometimes you need to right size. But most of the time it's like, hey, we want it. We need more people in this industry and in particular this business. So we're going to help you grow. And if you have access, staff, we're going to take care of those folks. So, you know, to date, I think private equity has been a net positive. You look at some of the track records. Maybe I shouldn't name names. You can tell me if I should or not. But there's examples of firms, you know, RAAs that have transformed themselves and grown exponentially. And that's not just because they got a bag of money. They got a bag of money from private equity and then a really good thought partner to say, hey, have you thought about this? Have you thought about that? And you look at some of the transactions, you know, Edelman and Financial engines coming together. Great merger that unlocked a lot of value and power. You know, without the private equity firm behind Edelman saying, gee, why don't we talk to these guys? You know, it's just a game changing event that Edelman, I think it was really smart move to go talk to them where they have that potential of deeper pockets to do things. Interestingly so today I see them as a healthy part of the ecosystem. I think they're enabling these sophisticated management teams of some of the biggest firms to think more strategically, build better businesses that are ultimately only going to help us families. Which is, at the end of the day, is the mission of Devon. That's all we care. You know, that's mainly what we care about. So I think they've been healthy to date.
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A
Yeah. Emerging new entrants. Maybe sometimes we refer to them as disruptors. But what comes to mind when you look kind of look down the road, some of the new activity coming in play.
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Yeah, you know, I think you can't ignore minority players, folks that are coming in to take minority stakes. And you know, the business case makes great sense. Right. You have an increasing number of advisors that have not solved for succession. You know, Catherine, you and I, you know, are, are concerned about this. And you know, lo and behold, only.
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About a third of advisors in our study say they have a documented succession plan.
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B
Yeah. Guess what the number was when I, when I entered this industry 20 years ago. I can't even imagine it was like 29%. So good news, like we've gone up 4% or something. It's just. And now the, you know, the, the roosters are coming home to roost or whatever that expression is. I just butchered something. But because of this lack of succession planning, because these firms become more valuable every year, we have an increasing number of firms where the valuation is exceeding the grasp of G2 and G3, we do an annual survey. We've done it for probably five years or so. This one's on human capital. I don't think it's released yet, but we'll release this data soon. And over the last three years we've seen this dramatic decline in the number of advisors. We're serving all advisors in the industry, over a hundred million. Now less than one fifth of Advisors believe that G2 or G3 can afford to buy out the founders. This was 38% 2, three years ago. So this is concerning. So back to your question. And we might even want to elaborate on that a bit, but back to that question. I think there's been a number of new entrants into that space, which is interesting because if you look at the data, and this is in our deal book, that will be released by the time this is released as well. Coincidentally, the number of minority transactions has been declining as well as a percentage of the overall deals. Now I think it will increase over time, but I think that can be a valuable solution for the space. And I just think. Well, an important caveat is sometimes an advisor thinks, oh gee, the staff can't afford it. I just want to take some chips off the table. I'll sell a minority stake and since I'm a majority owner, I'll still call the shops. Please don't fall under that delusion like devil's in the details. Some of these players behave well, some of them. We've seen some disappointing outcomes which were in black and white in the writing of these things. But it's important to realize that ideally you're not just taking capital, but you're signing up with a thought partner that can help you run a better business and or at least someone who's not going to hamper some of the things you need to do in the industry. So that's a new group.
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Why do you think that the appetite to really make a plan around succeeding the business has for all intents purposes remain stagnant. Even though the fact that I don't know about you, but I got a year older, I, you know, it's like, I mean we're all, we're aging and the businesses are evolving. But what do you think is calling, if you want to call it a paralysis, if you will, but what do you think is causing that immobility?
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B
I think there's two things and a recent one is more of an epiphany. For years I thought it was a psychological slippery slope. And I believe this is the case in a lot of situations where it's like, everyone knows they need to put a succession plan in place. So it's like, oh, I'm planning to do that. And then in the back of their mind they're like, oh, succession planning means change. I'm now going to have some folks around the table that are shareholders and decision make change. And it also means I'm talking about retirement, and retirement has changed and people don't like change, and retirement is that good or bad. And ultimately I die and I don't want to think about my death and I'm not going to do this. So a little bit of a slippery psychological slope, and I believe there's validity in that. A couple years ago, it sort of dawned on me that there's another component which might be a bigger driver, which is just the complexity of the whole thing. You know, Catherine, this starts with like, yeah, I should go do this, I'm gonna go do it. And then you go and you start, you maybe read some stuff and you might even see some of our stuff that says, okay, I gotta migrate. Not only equity, I gotta start migrating management. And then you're like, okay, equity. That means I gotta value the firm and either do it myself, which is not smart, or get an expert. And then I gotta think through deal structure, how they buy in, and the next thing you know, the list goes on and on. How are we gonna finance this? All these different things. And I, I, Katherine, I think it gets so overwhelming that people are like, I'm just, I'm going to put this on the back burner. I think it becomes a big hairball and people kick that can down the road. And we're seeing the implications of that where while that can sitting on the side of the road, you and I and everyone else is aging. Next thing you know, the company is worth more and more and more that retirement is more pending. And now you've just sort of painted yourself into a corner.
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A
Well, and to clarify too far, listeners, definitely when we think about succession, that is different than a business continuity, right? Those are, those are two different things. So, yeah, we're definitely getting a focus on that. I can't help but wonder as well, though, maybe a little bit of devil's advocate to your last comments. There's so much certainly in the way of consultants and the research that you all do, how all of this gets played out in the media and across our industry. My sense in talking with a couple of firms recently is there's a little bit of like, yeah, we don't really know what we're going to do. But it feels like when we're ready to do it, we're going to have a lot of options. We know from our survey that our advisors tell us that they on average are taking between six and 10 phone calls from interested buyers. So I worry that some of this complacency is this idea of we've got a lot of options out there and so we'll pull the trigger when we're ready versus as you were just even describing earlier, this really should be a multi year decision, an area of focus that pulling the trigger 12, 24 months before you really want to do something is probably going to be more like a fire sale. And so I don't know. Well, we'll see how that shows up.
- [28:43]
B
Well, I think the other thing too is I think the media one has fatigued on the topic, right. I talk to them and I try to wave a flag and they're like, yeah, we've been reporting on that for years. It's not interesting or sexy anymore. So I, I worry that that feeds that complacency. I think sometimes there's fear like, wow, you're going to have to sell externally or your company could fall apart or whatever else. Sometimes aspiration like, hey, I want to keep this in this business independent. Most firms want to sell internally. So I think that aspiration and realizing that if you want to sell internally, two things. One is if you want to sell internally, start as soon as you can. Because as soon as you're a shareholder too, you're riding along with the increasing profitability and distribution so you can invest more. And it's likely you're going to mitigate that. The mail truck getting too far away from the dog and the dog just can't catch it. So that's one. But it's important too. This isn't a blind spot. Having a succession plan makes your firm more valuable. So by putting this in place, the value of your firm increases and the reverse is true. If you don't have a succession plan and someone shows up and they're like, hey, looks like you and no one else here. And gee, we buy you the next day you get hit by a truck, this whole thing folds. There's a whopping discount that's going to occur by the way too. There's a bit of like, okay, we're buying this firm and they're not using best practices here. Everyone in the industry knows that you should have a succession plan. And gwiz, this is one of those folks who decided that they're not going to optimize the way they're running their business. It just shows that you as an owner, if you haven't put this plan in place, aren't doing everything you should be. Which raises a yellow flag of like, okay, what else is it done here? I don't love saying these things, but conversely, our job, you and me, is to help people understand those potential blind spots they have. So a lot of good reasons to put that plan in place as soon as you can.
- [30:29]
A
Yeah, great perspective. So we've been talking here around the sort of the sellers succession planning. Let's talk about the buyers for a little bit. Let's talk about, particularly if you're a firm that maybe wants to enter the acquiring space and position yourself as an acquirer. What would you say to them?
- [30:47]
B
Yeah, yeah. So a couple thoughts. One is, man alive, there are so many people that want to be acquired. So that's another question we ask each year. I might get the stout wrong, but we say, hey, in the next two years do you plan to acquire? And I think like maybe 60% of advisors now say they plan to acquire someone in two years. In over a billion, it's like 75%. We're nerds. So we did the math and here's the red flag for anyone who's like aspiring to buyer. Remember, we just saw the data or we just talked through over $100 million sellers. There's 250 that occurred last year and the year before. Essentially in that zone. When you do the math, 60x percent acquiring firms over 100 million, that means like 2500 transactions, I think 26. So it's just impossible. That's just not going to happen. So few thoughts. One is I'd encourage you to move toward having conviction that you're going to buy and suit up and you are like bought in and you're going to go do this. And you need to separate yourself from the rest of the pack. You got to take it really seriously because so many others are. And by the way too, if you're an independent firm, you got to suit up because you're competing with ninjas, folks that have done 10, 20, 50 plus transactions. So you want to make sure you're buttoned down, you have your story, thinking through all those elements, how you're going to value the firm, the deal structure, the reporting structure, what happens with fees, what happens with compensation of your employees, all that stuff. You just need to think through all that stuff and gear up and say, look, we're committed we're going to make this happen. One of the key reasons firms are acquiring is to acquire talent. Talent is a challenge in this industry. So that's 76%. The number two thing is right behind it, right behind it, 74% is to grow. Grow their. Their client base. Now, my concern, Catherine, is, as you've seen, the data, like organic growth has dropped, that some people are like, oh, not good at organic growth. Hey, we'll go acquire. Gee, that's a quote, unquote easy way to grow. This is like the hardest way to grow ever. The number two reason that sellers sell is to grow faster, right? Little unintuitive because a lot of people think, oh, you're selling, you're hanging up, you're retiring. No, most people, I think, have thought, gee, we're not good at this. We want to join a bigger brother or sister that can help us grow faster because growing is fun. So back to you being a buyer. Your ability to articulate, look, we figured out growth or we're getting darn good at it. Look at our track record. This is what we're doing. We're asking for client referrals. We're working with centers of influence. We got this digital strategy. Tell that story if you have it. And that will carry a lot of weight with sellers. So a couple ideas in terms of the buyer side of the equation as you approach this.
- [33:17]
A
Well, I feel like that messaging, your conference, our conference, throughout all the different sessions we do. And folks we talk with that. The ability to show that organic growth, that that muscle is built and that it's in play is something sellers are looking for and buyers absolutely have to be able to demonstrate. I think it was our good friend Scott Slater that said, just because you can't grow organically is not a reason to start growing inorganically. And I think there's a lot of truth to that.
- [33:45]
B
And people forget the power of growth. Like, and by the way, as you put your growth strategy in place of nerd out on growth last couple years, it's so important to remind your staff why you're doing this. And the number one reason is what we do is really good for the families that we work with. And we want more in our community to benefit from our services and almost save them from the other options, right? So I think with your staff is like, oh, it's not just, hey, we're going to grow, and like, oh, it's another task I got to do. And great, we're growing. Who cares? It's like, no. The whole reason everyone in this company is working here is because we love taking care of clients and making their lives better and we want to do this more in our community. And then, by the way, as a growing firm, career paths are better. You're hiring more junior people too, so the senior people and people like have less administrative activities. You're serving your clients better because you have a bigger staff. You're able to add more capabilities and services and there's just so much power and value. So, yeah, sorry. Get excited about growth. I'll stop.
- [34:44]
A
As you said, get purposeful about it. Suit up, apply the resources appropriately. This is not a, as I've often said, you can't pick this up at 3 o' clock on a Friday afternoon if you're, if you're looking to, to be a buyer. So I'd love to maybe kind of circle back just in our remaining moments here. And we know from our survey that we've done last few years and I know, I think you've seen this as well too, that lack of cultural fit. I wrote an article on LinkedIn about how it's kind of like the kitchen. It's the junk drawer in your kitchen. Does every. Please tell me you have one too. That'll make me feel better.
- [35:15]
B
Oh, yeah. Oh, yeah.
- [35:16]
A
But it kind of, a lot of things get dumped into that, knowing that, that cultural fit is really, really important. What are one or two ways that you see where firms can pretty quickly kind of get to the heart of that question, and if it's not a fit, move on. Right. Don't waste each other's time, if you will. What comes to mind on that?
- [35:33]
B
Yeah, I think it's great. You know, there's self awareness too. I mean, we, we joke internally. Sometimes it's like, oh, it's not a good cultural fit is what a seller might say. And it's like, that's kind of a throwaway excuse for you, for some reason you didn't like their website or something. So we're like, tell us about that. Like, what is the culture? And then even challenge yourself through that and say, hey, let me write down on a sheet of paper. What, what? The culture, how I define my own culture, what's important. I can rattle off stuff like rigorous analytics, transparency, fairness, all these different things, points of precision. You heard earlier, first mile, last one. Like, we've thought a lot about what our culture is and we use that when we, when we hire, when we think through our strategies or sub strategies or the services we're going to offer, et cetera. So I. I'd encourage folks to become self aware, right. Move beyond this grayness and put a pen to paper and say, all right, what are the cultural characteristics of. Are firm. And then be prepared, too, to ask what the cultural characteristics are of the folks on the other side of the table. That's a constructive dialogue. And take a grain of salt, too, because people will probably react the way you did when I first asked this question. Like, I don't know, I haven't really thought about it. And I'll be like, all right, you're fired. You know, it's like, okay, yeah, well, let's talk about it. But then I'd say, you know, the other thing. A couple questions that are really powerful because how do you make the intangible culture tangible? Well, not only writing it down, but there's certain questions. Some have said culture is what people are doing when no one's looking. Right. So that's one. One thing. I think culture also becomes apparent in challenging times. So questions like, gee, when Covid hit how did you work with your staff? Or how did you work with your clients? Or another variation of that is like, when you have an underperforming employee, how do you manage that? There's no wrong answer. Gee, we rip the band aid off, we hire slow, we fire faster. Gee, you know, that's my Achilles hill. I keep thinking the best of someone. I let them keep going, et cetera. There's no wrong answer. But there's a. There's some clues in there. When the stock market declines dramatically, or this one's even better. You have an abusive client, they're a big client. They're very abusive to your staff. What do you do about that? Well, you know what, They're. They're a significant part of revenue, and it's part of our job. The clients, Clients always right. Are like, no, we. We're not going to tolerate that. Again, there's no wrong question. So, you know, brainstorm yourself. But periods of adversity or dynamics that are adversity tend to be great clues in terms of the culture, aside from like, hey, teamwork is great and we look out for the best. And, you know, the adversity is really where that comes to light.
- [37:59]
A
Yeah. And absolutely. Your point around it really is what happens when, when no one else is around. Right. When there's not someone else in the room to observe your behavior. How do, how do people operate?
- [38:08]
B
And Catherine, you know, you brought up a great point earlier, too. Like, as you're looking for that buyer, don't look For a carbon copy, have that open mind to be like, okay, this is our culture, theirs is a little different. Welcome to the world. Things are different. And how do these mesh? Like, how would this come together? And is there some value and power, gee, merging with this firm where they're pretty good at ripping off the band aid when someone's an underperformer and that's something that I want my company to do more of. Like, that's a net positive. So starting to realize that you clearly don't want to sell to someone or, or by someone who is a cultural misfit. So keep an eye out for those flags, but be open and aware about these complementary elements where it can unlock more value and power for both parties.
- [38:52]
A
I want to finish It's a. It's a question I've put to some of my prior podcast guests. It's based on James Mattis, who's a four star Marine Corps General, former Secretary of Defense, and he talks about how solitude allows you to reflect while others are reacting and that we need solitude to really refocus, think about our decision making. We've talked a lot here today about getting candid, getting real, really kind of dialing in rather than just reacting to problems or otherwise. And so I would love to ask you, as a leader, you've got a good sized business, it's evolving rapidly. How do you recharge? How do you seek solitude so that you can be the very best leader that you can be?
- [39:34]
B
Yeah, you know, it's interesting because I'm not probably unlike a lot of leaders out there where I'm almost manic, right. And part of it is massive amounts of coffee that I consume on a daily basis. I think I'm personally wired just to have monkey brain, as they say. Like I have trouble stopping to think. So I think Mattis is spot on. What I've found and took me years to realize this, that solitude, not only physically, but solitude of thinking is what helps me. And what do I mean by that? If you look at what I've gotten into, and I tend to get obsessed with things, is obsessed with golf for a while and then yoga for a while and then rock climbing. Right now it's guitar. Just getting back into guitar and things like that. And over time it dawned on me that the things I tend to get obsessed with are things that I cannot think anything about while I'm doing it. You just can't think about anything else when you're trying to put these new chords together. So it enables me to be really thoughtful about one given thing at a time and invariably what happens after that is I have this sense of equanimity and this sense of like clarity of mind where then that vessel is open to get all weird and Buddhist, etc. But after those things my mind is clear and I can be more thoughtful and specific on something rather than sort of this set of waves that are coming through. So sorry to get all metaphysical at the end here, but yeah, yeah, I think you raise a great point in terms of that solid in the value and power of doing so well.
- [41:02]
A
And it requires time and intention. Right. And being intentional about that. And so thank you. That, that's.
- [41:10]
B
Well, I'm curious. How about you?
- [41:11]
A
Well, it's funny you mentioned the yoga. So Pilates is. Is the same thing for me. Yeah, yeah. Fear of falling off the reformer is a very real thing. So I can rarely. I cannot think about other things and then anything after that. Probably you'll just find me like if I don't get to live music every once in a while. Certainly traveling is not. I mean, I travel a lot for work, but traveling generally is a great recharge. Well, thank you so much, Dave. It was great to talk with you and your perspective is incredibly valuable. This industry is all the better for having you a part of it and I just really appreciate you taking the time, the generosity of your, of your time and knowledge with us today.
- [41:49]
B
Thank you so much, kind words, honored to be here and just always a pleasure. Whether it's podcast or talking about what's happened in the industry, it's always a pleasure talking to you. So thank you so much for having.
- [41:59]
A
Me and thank you everyone for joining us today. If you want to learn a little bit more about what Dave and his team are doing, you can find them at devoandcompany.com, linkedIn, the usual outlets if you will. And certainly you can reach out to Dimensional. Thank you very much for for joining us today and we will catch everyone next time.
- [42:16]
B
Thank you for joining us for Dimensional Fund Advisors Managing youg Practice Podcast. For more information, please visit www.dimensional.com. dimensional Fund Advisors LP is an investment advisor registered with the securities and Exchange Commission. The views, information or opinions expressed during this podcast are so solely those of the individuals involved and do not necessarily represent those of Dimensional or its affiliates. Dimensional is not responsible for and does not verify for accuracy any of the information contained in the podcast. All expressions, information and opinions are subject to change. This podcast is distributed for informational purposes and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products or services. Please consult with qualified legal or tax professionals regarding your individual circumstances. Investing involves risks. Risks include loss of principal and fluctuating value. This podcast is available for private, non commercial use only. You may not edit, modify, or redistribute this podcast without the express written consent of Dimensional. Dimensional assumes no liability for any activities in connection with this podcast or for use in connection with any other website, computer, or playing device.