When writing about the undertaking of due diligence on potential Discretionary Fund Manager partners I often refer to the importance of cultural fit. Articulating what this means however can be a challenge particularly as it’s a subjective measure.
However, I recently spotted an article by Mark Tibergien, CEO of BNY Mellon’s Pershing Advisor Solutions which looked at culture in the context of mergers and acquisitions and thought I would share some of his key points.
Tibergien explains that one way culture can be revealed in advisory firms is through compensation and the behaviour this reinforces. Client acceptance, retention and billing and policies around people development and staffing are also important reflections of culture.
He believes that firms have an opportunity to differentiate themselves by emphasizing the strength of their culture and this can be important in an increasingly competitive market for prospective buyers and sellers.
Tibergien breaks down culture into four categories:
- The Human Capital Experience
Annual revenue generated by new business often represents as little as 5 to 10% of the total revenue. The majority of income into advisory businesses therefore now relies on delivery of ongoing services which meet customer requirements thereby both retaining them and hoping that they refer others.
An advisor business needs to ensure they have the right people in place both to deliver ongoing service and to find new clients but the balance of these staff has shifted over the years. It’s therefore important that all staff are trained and developed according to their role to ensure that they are valuable assets to the firm. This can be a challenge for smaller businesses but mergers can assist with increased resource and capability.
- Pricing Philosophy
The way in which firms charge clients has changed significantly particularly since the introduction of adviser charging where clients now pay for the delivery of ongoing services.
Fees have become increasingly common and can at times be complex where the flexibility of fixed charges, project fees and caps or reductions based on asset levels are used.
It’s therefore important that consistency of fees post-merger and clarity as to how these relate to client services are fully understood.
- Compensation Philosophy
Payment of advisers is always an important area and can be a challenge in a merger if the firms have different backgrounds. As remuneration can be sensitive then the different options on compensation for advisers should be agreed early in the merger discussions and process.
- Decision Making
Decision making frameworks usually require a review post-merger. For example, if an entrepreneurial business is involved then there is likely to be an owner/founder who has had to make sacrifices and take risks throughout the life of business. They often do not run businesses based on group-decision making but that may change as the business moves from entrepreneurial to more professionally managed.
As a result, the decision making processes not just for leading and managing the business will require to be reviewed but areas such as decisions on technology, staff, and distribution of profit will all need to be considered.
This may ultimately result in a shift of power in the organisation.
Does Culture Matter?
With all this in mind, Tibergien would argue without question that culture matters. Prospective parties for a merger need to share a similar management philosophy and agree what they will be delivering going forward to both clients and staff.
So whilst there is potential for conflict, mergers or acquisitions can also deliver powerful businesses particularly if there is a good cultural fit. However this relies on the management teams to work together and ‘an aspiration to endure beyond the founders’.