Feature – Q & A with Tim Bello
We’re excited to introduce our newest feature, Fusion Insights, that will be an interview with one of the foremost experts or leaders in the investment advisory industry on real-time, relevant topics. This month, we’re proud to feature Tim Bello, Managing Partner of Merchant Investment Management who will take us through the journey of M&A, retirement packages, what an advisor should be considering on the ownership path and whether you should take capital to invest in your business among other timely topics.
Tim, thank you so much for taking your time to join us to share your extensive wealth of experience in the business and now at Merchant who has been incredibly successful in investing in high-performing teams.
Let’s get to the first question –
What are the keys for a successful deal with Merchant and describe the process?
The keys for a successful partnership through the Merchant lens are heavily focused on the art of people coming together to collaborate and align interests in the spirit of improving both the advisor and client experience alike.
For the purposes of today, I’ll break some of our views down into three simple silos:
Strategic growth and efficiency: Can our engine add efficiency, durability and occasional speed to your car? It’s always complex when bringing together two partnerships that each have their own set of capabilities, conviction and personalities, but it’s easier from the Merchant position as through our investment, we’re a minority non-control partner.
Improvement without disruption: Don’t fix what’s not broken and don’t change what already works. Our focus and desire are to help our partners improve upon what is already done well – including but not limited to business solutions, solving complex client situations, and being a truly strategic growth partner both organically and through selective M&A.
Culture of accountability: Our partner firms should feel the engaged energy that any shareholder would want and expect from any good partner, which from our seat means being out of the way when it’s not our place but being on call for anything at any time. We prefer the minority position and find it’s in our DNA to work as hard no matter what. We’re accountable to our partner firms, and they’re accountable to us…..that’s the definition of a true partnership.
In terms of our process, there are four key components that have to be understood and agreed upon fully:
- The People – are culture, vision, and energy aligned? Can we work together, have fun and be successful? Sounds simple but finding those folks beyond the numbers and then making it gel is hard and underwriting one’s character is even harder. That said, we’ve done well in that department so far.
- Fairness – setting expectations, agreeing on value, and both sides working through constructive discomfort to get to a fair middle ground for capital entry.
- Growth – organic and inorganic, and given that each firm we partner with is unique, what’s Merchant’s capability and ability to help in both cases? Growing responsibly and carefully is smart, not growing at all isn’t interesting and growing too fast can be dangerous.
- Additional Value – can we help with other aspects of one’s business to whereby were busy and engaged consistently. This means infrastructure, investment solutions, best business practices across the board, and in some cases succession planning and overall partner dynamic.
Advisors discuss a lot about valuation — discuss its position and importance in the deal consideration and how it can be enhanced.
Valuation is important but so is adding value. In terms of valuation, for financial advisors it’s something that many of us never thought would come into our range of dialogue. Wealth management was always thought of as a world of solo practices in the past, and today more than ever you can be viewed as a business and if grown with scale in mind that can evolve into an enterprise. That’s best achieved with the right partner.
Enhancing valuation can be achieved in several forms – AUM, nature of revenue, operational scale and efficiency, human capital, profit margins and growth capability both on the organic and inorganic side of the business.
We clearly have seen evidence of it. So how does that translate into success?
A firm with diversified size, predictable revenue, a solid infrastructure and a great team with optimized margins that has achieved above market growth for the last 3 years while weathering “market storms” will command the highest valuation range.
How do you help a firm achieve their equity objectives? Discuss the complexity of taking on a partner.
The best way to help a firm achieve their equity objectives is less through a transaction and more through an alignment mindset and exercise. This means understanding your goals as the operator, or majority shareholder group.
Why are you really looking for a partner? Sometimes solving for numbers isn’t enough and in other cases it’s all that matters. If the objective is to cash out, that’s one group of capital providers, whereas non-disruption of culture, capital alignment and growth partnership brings another type of capital partner.
Taking on an investor or partner are two different things, and both are equally complex. I would say really focus on the incentives attached to the capital; it will determine the behavior of those that represent it. Understand their knowledge of the space and how well the capital group “gets wealth management”. And lastly make sure the personnel you meet are aligned with their initiative and can’t be replaced by a “backer”.
How do you educate advisor-owners on the difference between real equity vs. profit rights
From the owner’s seat, when discussing real equity vs. profit rights, we think of it as taking in a common equity investor vs. a preferential security. Common equity is where the security is 1 to 1 across the cap table, as “you go up we go up, you go down we go down, bottom line-aligned”, whereas a preferential security behaves more in line with a debt-like instrument which locks in a yield for the investor. There is no right or wrong per se, instead different situations require different types of solutions.
When not taking in an outside investor, but instead focusing on internal cap table dynamics, profit interests or performance shares are an excellent way to reward existing and bring in new exceptional talent without dilution to the historical value that was created.
There is an ocean of 1099 affiliates that can operate without the constraints of their employee counterparts – how do you educate them from starting the working capital stage and progressing into equity realization?
Don’t always begin with the end in mind, focus on one hill at a time. With working capital, don’t over burden yourself with too much infrastructure and operational expenditure. Hiring too far ahead can create a problem just as the same way under resourcing can also turn into an equally big issue.
We have advisors who ask about whether they should take an offered retirement package, and we say, “why shouldn’t you take the retirement package you’re being offered.” How would you comment?
Retirement, if the circumstances are not forced, should be a proactive vs. a reactive decision for the advisor. So, for starters, retirement is a long-term plan and it seems like retirement in the wealth management space is best planned and executed on as a business owner vs. an employee. So, the first advice is before you think through the “package”, A) make sure you’re in the right structure or said differently be a business owner so you can put together your own package, B) understand fully the value of what you’ve built through your eyes but be sure to have some help along the way to make sure you’re getting it right.
Always have subject matter experts by your side at the right time to protect yourself from yourself and the unknown. Bring in some outside degree of objectivity….
And second, retirement should be and feel like an exciting value optimization and value protection exercise, vs. a stressful and one size fits all exit “package”.
Tell us about Merchant. Your website says that “We are principally aligned growth partners”, can you elaborate on alignment and partnership?
Merchant is a private partnership that aligns with owner-operators in the independent wealth space through making minority, non-control growth equity investments. Along with our capital, comes our people and our expertise focused on execution both at the business and occasionally underlying client level on behalf of our partner firms. We look at our partnerships for some as an event that precedes THE event. Principal alignment drives all parties to create ultimate optionality around growth strategies and outcomes for each other.
What are your key attributes in starting a conversation with an advisor who is looking for guidance on working capital?
Can you fulfill your capital need, with a temporary solution as in debt? If the answer is no, you’re probably looking for a partner. If the answer is yes, find the best source of debt that understands the wealth space and get educated on rate, terms and covenants.
Where can you provide clarity to an advisor when they start a dialogue in considering a financial partner or succession plan?
What can the capital do to you vs what can it do for you?
Do you want capital, do you need capital, or are you looking for a partner that also happens to provide capital?
Is value or valuation more important to you, and how do you strike the fair balance with a capital partner, so the alignment is fair to all?
What message would you convey to the advisor-owners who are transitioning from a business into an enterprise?
Hurry slowly, even when it seems like it’s hard to slow down. Responsibly-controlled growth is key, it’s aligned with once a client has achieved a certain level of wealth, our job as advisors is good growth but even better preservation.
Maintain a systematic approach and always remember, growing from within the walls of your firm requires real investment back into the business of both time and capital, understand why it’s an investment, not an expense. This also applies to hiring and retaining talent, both equally important to the durability of a business on its way to enterprise.
Can you elaborate on the enterprise further?
Enterprise firms have multiple lanes of stability, revenue, and growth. They can weather storms and are most certainly not centered around one person or personality. An enterprise is a machine with both science and art, they aren’t built over night, and the culture and brand are clear. They coincide with the client and the advisor experience – quality at the forefront, and quantity never takes priority.
Enterprises are also operated by a professional management team, separate from the team that covers clients. The presence of a CEO / COO to run the day to day and operate the chassis of the company is a key component of an enterprise. For those firms that have one or more founders who are advisors, they may begin to think about minimizing day to day client coverage or hire an operator in place of the founder changing his or her role.
What are some of the factors that are overlooked or understated by owners that are engaging in this process?
That inertia is the largest enemy.
Strike the right balance between art and science, and don’t let the numbers solely drive a business of people.
When you’re hiring do you let the role, you’re trying to fill drive the process or should the skillset and raw talent of those available drive your decision to bring on the next professional?