Critical factors for success in wealth management

I recently moderated a Financial Advisor Magazine webinar featuring Merit Financial Advisors CEO Rick Kent and HGGC Chairman and Co-Founder Steve Young, who also happens to be an NFL Hall of Famer and Super Bowl Champion.

In January 2021, Merit and HGGC entered a strategic partnership to expand their footprint and partner with advisors and advisory firms. During the event, Rick and Steve shared best practices on deal-making, firm culture, and leadership as well as their perspectives on why they are both so bullish on the wealth management industry. 

The below Q&A highlights the key takeaways from this insightful discussion:

Suzanne Siracuse: Steve, if you would describe a bit about your firm, HGGC, and then talk about how you got into the private equity business after your football career?

Steve Young: We were in Santa Clara, California, and there was a group of us that watched the explosion of Silicon Valley in 1992, '93, '94. We were smart enough to see that something really unique was happening. We started to invite business leaders, and specifically venture capitalists up and down Sand Hill Road, to come into our locker room. We traded access to deal flow for access to the locker room. 

That got me started in business before I even finished playing. We started Found.com and then sold it to CRS Retail, and from there I got into private equity. Now, I've worked in private equity much longer than I ever played football, which I played for 18 years. I'm that old that I can have two careers that span that much time, but private equity is familiar to me. It's about people, winning them over and getting them to agree with you. It’s about how to negotiate partnerships like Rick, and I have done so profitably so far, finding that spirit of abundance that's in every relationship.

I'm not a zero-sum game guy. I didn't play that way as a quarterback. I always looked at the relationships around me as my teammates, as people that are going to help me succeed and how can I help them succeed because that's how I'm going to find my success.

Suzanne Siracuse: I imagine you learned a lot from your days playing professional football and you've had a ton of successes, but there were challenges as well. What did you learn from both those successes and challenges that you've been able to apply to business?

Steve Young: Suzanne, when I went to the Pro Football Hall of Fame in 2005, I had my dad introduce me. He's a lawyer and a very serious man. He wrote the speech, and I didn't know what he was going to say; I didn't check with him, but the speech was titled, “Man, My Son was a Long Way From Canton”, meaning throughout my life you would've said yourself, do you see him here in the football Hall of Fame? He was like, "No, he's a long way from there." 

So much of what is defined and why I ended up being there was the challenge. Everyone always says, "What do you learn more from? You learn more through the challenges; you learn more through the rigor of life." I never say, "I can't wait for the next challenge." But when I see it, I do look at it differently. I think that in my mind, it's that place of growth. If my life's work is to see how I can grow and improve as a human being, if that's the goal, then in some way I need those challenges that have come up through the years. 

I remember when I took the job to be the backup of Joe Montana, I never intended to be the backup to Joe Montana. But someone gave me a tip early on and said, "Steve, if you have a job today that you don't necessarily want, but you want another job that's better, then be the best at what you have right now." I thought, "Oh my gosh." I became, in my mind, the greatest backup quarterback that ever lived. That was my goal. Even though I hated the job, I wanted to be the greatest backup quarterback that ever lived.

Doing that was the launching pad for the actual job that I wanted. How many people have a job today they don't want? They want another job, but they don't see it as the actual springboard to be excellent right there. Be the greatest number two that ever was - that's what you must treat it as.

Suzanne Siracuse: That's great advice for everyone out there. Rick, I want to segue to the question that I asked Steve about challenges because I agree, I think you learn a lot more from challenges that you face, than from the successes. Are there challenges that you've learned from in your career that you really feel have propelled you forward?

Rick Kent: I definitely agree. When things are going great, it's easy to show up for work, and it's easy to do the things you know need to get done. But you're really not learning a lot during those times. When you learn a lot is when things don't go the way they're supposed to, and all of a sudden, you're hit with challenges and obstacles. I've learned to really love those moments and embrace those moments because I know something great's coming. I think your mental state is very, very important. I really try to guard my thoughts because I become what I think about. I discipline myself, "Rick, you better be thinking about great things. You better be thinking about big things," because your mind doesn't care if you want to accomplish something small or something large, it just looks for the picture that you've put there, and it goes after it. 

Suzanne Siracuse: Rick, I want to talk about the fact that your firm is on just a huge growth trajectory. In fact, I think it's been 15 acquisitions over the last few years. You also sold a minority ownership stake a few years ago to a private investor, Wealth Partners Capital Group and to Steve's firm. Tell us a bit about this. What were the considerations that went into this decision and how are you keeping the growth going?

Rick Kent: Looking at the trajectory and thinking about wanting to grow more, we knew that we were really going to need more support. We really knew that it would be great to start thinking about finding the right partner to bring on. Something we had not done up to that point. We had made nine acquisitions and we were growing but, with acquisitions, it takes a lot... There's a lot of investment. You have to have a lot of cash and you have to have a lot of drive power and to be able to continue. We thought, "What are we going to do to position ourselves to be that company that can grow?" We started the process, went through an investment banking process and interviewed and talked to a lot of different people and we started thinking, "What do we really want? What does it mean?"

I can remember having the conversation, "We're going to bring on a capital partner and we have to find the right partner." I know if you find the right partner, things could really be great. Some of the criteria that we put out there is that we wanted somebody that would take a minority position with us. We feel good about what we're doing. We feel like we've built a pretty good team. We didn’t want somebody to come in and take us over and say, "Hey, Rick, you're not going down those paths anymore. Now you're going over here." I didn't want that. I felt like, that I want to play hard, I want to deliver, I want to build relationships, I want to build a company and I don't want to be told to go down a certain road.

Certainly, we wanted somebody that can help us with debt and equity financing and understand those markets. That was really important. We knew that we needed a big player that could do that and somebody really that had expertise and experience that we didn't possess. I mean, we were a small company then. That was less than two years ago. We're a lot larger company now because of this partnership. We knew we didn't have all the answers and that we needed to align with people that really knew how to grow a business. It's one thing to be a financial advisor and to be in the financial services industry. It's a very different thing to grow a business. Fortunately, I had a little bit of success as a financial advisor and then moved on to learn what it meant to grow a business.

I'll tell you, the partnership with Wealth Partners and HGGC, it's been phenomenal. We have grown over 200% since that time. We had done nine acquisitions going into the partnership, and we're currently sitting at 21.

I mentioned that we were looking for somebody that had expertise and experience where we don't have it. A good example of where our partnership is working today is that as our company is growing, the title or the job of a CFO for our company is becoming very, very important. You have to know your numbers -- the people who are providing debt financing ask for a lot of information, so you have to be prepared.

It’s just a great example of how this partnership with Steve is working right now. First of all, Steve made his employees available to Merit to help us with this process because we really didn't know exactly where to start. Then the connections through HGGC, putting us in the right place to find the debt financing that we need to continue on. It's just a real testament to what a real partnership is, how it's built.

Suzanne Siracuse: What advice do you have for advisors that are looking to sell practices? If they're looking to sell, what's your number one tip?

Rick Kent: I see a lot of firms that seem like they're frozen. Markets drop 25%, they're hearing about higher valuations out there, they want to move forward, then they don't know if they want to move forward. I really want to encourage them to think about more than the valuation. The valuation is important. The amount of money that you're getting for your firm, I'm not going to say it's not important, but I'm going to say that the partnership and finding the right partner is more important. A good example is our partnership with Wealth Partners Capital Group and HGGC. They weren't the highest bidder; they were the best partner.

Suzanne Siracuse: We often read how firm culture can really make or break a deal, Steve, what does culture mean to you? Can you share an example or two of where it's worked and where it hasn't?

Steve Young: Culture is how your employees collectively feel and how by definition, once you do that, how they make everyone else feel. What is that sense of interaction with the relationships that we have, this collective relationship internally. Then as a group, what is our relationship going to be like? Individually and as a group, how do we create that sense of value and that sense of how we make people feel. When you talk about values and the culture of a firm, it has to make people feel safe and heard and empowered and not told or talked down to. There's these values and cultures that are built from the ground up, that's why I was attracted to Rick because he'd built something that resonated with me.

Suzanne Siracuse: Rick, we mentioned all the acquisitions that Merit has been doing, but have you ever walked away from a deal because it wasn't the right culture fit?

Rick Kent: This last quarter actually. We talk to a lot of people. We have over a hundred conversations going on right now with different people at different stages. When we get serious with conversations, we begin to do due diligence. We want to go see them at their office, we want them to come to our office, we want to spend time together, we want to go break bread together. I usually bring in other people in the firm because I want more than just my judgment when I'm talking to somebody. Our President, Kay Lynn Mayhue and others are a part of this as they just have that unique ability to zero in pretty quick, "Hey, this is a good egg or not so good."

In this particular case, we were moving pretty far along. We were under LOI with the firm, and it was a good size firm and a state that we weren't in yet. I'd been down to their office, talking to their employees, all that. But my team began to give me feedback. The first feedback I got, I thought, "I appreciate that feedback and everybody has an opinion. This is going to mean a million and a half dollars’ worth EBITDA for us. You may not like this person, but I think we should continue on."

Then the investment team came to me, and they said, "Rick, we were talking about investments. I don't think we're really aligned on investments. I think their investment style's different." I said, "Okay." Then I continued to get feedback from different departments, and I really listen to my team. I want everybody to have a voice - I make a lot less mistakes that way. It was painful for me, but I had to pick up the phone and call this person and say, "I don't think it's going to work out for us."

Suzanne Siracuse: You guys are both very, very bullish on the state of the wealth management industry and investing in the wealth management industry. What factors lead you to believe that wealth management is continued to be poised for growth? 

Rick Kent: There was an article that I read from DeVoe & Co that stated Q3 2022 was one of the busiest quarters ever for acquisitions. You wouldn't think so with the market being down two quarters in a row and 25% down in the market, but it has been one of the busiest quarters ever. The article pointed out that most of these practices that sold are under a billion dollars. Not the really big practices, but the sub one billion, that activity still growing strong. 

I know Peter Nesvold was quoted by saying one of the reasons why things are going to continue to be strong in this industry is private equity, great firms like Steve Young’s investing in this industry. That's a big one that's driving it. But another factor that Peter mentioned is that debt markets are more challenging, stock markets are declining, markets are changing and but one thing that’s not changing is the demographics of the aging advisor. That advisor has built a great practice and he's got 35 or 40 years invested in building that practice. He's getting older and that's not changing. There's still a need for him to find a place for his clients and to make sure that he's doing the right thing by his clients, by his employees, and finding the right succession plan. That's still driving a lot of the M&A activity.

In addition, I think the deal structures may change. I had a conversation with an advisor last week. He goes, "Rick, we looked at my valuation back in March, now we're looking at it at the end of September. Rick, it's dropped, it's quite a bit less." I said, "You know what? We're going to try to figure out a way to get creative on that." I just said, "Hey, do you believe the market's going to come back?" He said, "Yeah, I think it is." So I told him, “I'm going to put a growth bonus component into our deal. If the market comes back, you're basically going to be seeing the numbers you saw back in March." As those acquirers, we're just got to be more strategic in putting the deal structure together.

Suzanne Siracuse: Steve, from your perspective in private equity, your firm invests in a lot of different types of business. And you invested in Merit. What makes you feel so good about wealth management?

Steve Young: The businesses that have more intimate relationships with the client regarding wealth management, with taking care of people's finances, taking care of their futures, is a place where that relationship is vital. What can we do to accentuate that relationship? What we're finding from a lot of the owners that Rick's talking to is they want to be empowered to do the very thing that they love doing. What they don't want to be doing is in the background, trying to run a business that takes a lot of people and a lot of time. How can we empower those owners to join forces and get on a platform where they're still empowered, they still have equity in it, they still get to do the very thing that they love doing, which is getting out with the clients and being with people and showing them the way forward in tough times like now.

If we're doing it right, it has its own momentum because the platform we're building it's serving in every direction. The highest priority is the client and the background, it's employing a lot of people to do something that can help multiple arms and locations of a business in a very, very efficient way that creates that service model. 

Rick Kent: A lot of times I find myself in conversations with advisors and they'll say, "Rick, things are going very well for me. My income is great. I've got a good team; I've built a good practice. I've got 20 years left in the industry. Rick, why should I even have a conversation with you about partner shipping or coming together?"

I say, "You know what, that's a really great question. As a matter of fact, based on what you just said, I think we should have a conversation." Because I don't want to buy a practice if somebody doesn't want to work and just feel like they can accomplish more. I really don't want to talk to that person. I want to talk to the person who sees the sky....they'll shoot for the moon, but here's the conversation that it comes down to.

I sit down with them, and I say, “Let me paint a picture for you of what a partnership could look like. What I want you to do is project out three to five years of where you're going to be. Don't tell me. But you just think about where you're going to be from the value of your equity, what you're going to build on your own, the team that you have today, and just project out where you're going to be and keep that thought in your mind. Then I want to pull back the curtain. I want to show you what a partnership could look like. You haven't considered a partnership. I can tell you what my partnership with Steve’s firm has done for me; we've had phenomenal growth. That is something that I just didn't know until I experienced it."

Now I can tell that story to other advisors, and I say, "Look, at the end of the day, it's really going to come down to you looking at those two scenarios, those two paths, and you decide which one's better. If it's better for you to stay on the path you're on, that's what I want you to do. If it's better for you to share in the equity and you and I partner together, we move forward and where I can take some responsibilities from you and you can continue doing what you love to do and you end up in a better place from a value standpoint, and then we should partner. That's really the conversations I'm having and it's fun.

Suzanne Siracuse: How do you grow organically vs by M&A activity? What is your philosophy? How do you figure out the division of time and resources for each of those areas?

Rick Kent: Do you have the drive to grow?  That's the first question a person or firm needs to ask themselves. Because if you ask anybody, "Do you want to grow? Do you want to make more money? Do you want your firm to be more valuable?" It's a yes, yes, yes. But evaluating if you really want to do that and if you have the drive to make that happen. That's the real question.

I know for me…I did have that drive. I really wanted to build a successful business. When I got in the industry, I quickly moved from being an advisor to start building a company and building a team. That's really what I was focused on. I thought I need three growth engines. I don't need one, I need three. 

The first was organic growth. I would stay focused on organic and look at 10 to 15% annually, leveraging niche markets to make sure that the growth was there. Secondly, M&A. A lot of people go through M&A. Can't ignore that. I've got to have a vision for that. Third, I wanted to start working with advisors who wanted to keep their independence, but yet still wanted to have some kind of partnership. I had to set up an RIA with an OSJ model. Those are my three growth engines, and that's propelling us forward today.

And a bit of advice.   If you’re going to go into M&A, you can’t do it part-time, it’s a full-time business. You have got to have a transition team, an integration team and somebody doing valuations and a stellar legal team is critical. I mean, this is very comprehensive. It’s not something you can casually do, make an acquisition here or there. 

Organic growth is always a winner. When you've got something working for organic growth and you know how to do that, stay focused. You want to continue growing organically. If you grow enough organically, you might be able to find a way to add to your business to start an acquisition division. But remember, it is a full-time endeavor.

This article was originally published on Merit Financial Advisors' blog on December 16, 2022. Used with permission.