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Investment Adviser Acquisition Due Diligence Mistakes

United Atlantic Legal Services

United Atlantic Legal Services, a boutique law firm focused exclusively on investment advisers, has worked with firms of all shapes and sizes through the acquisition due diligence process. We focus on legal and compliance risk so buyers and sellers can confidently purchase or sell their respective investment adviser businesses.

Today we will be discussing 5 common mistakes we see during the investment adviser acquisition due diligence process.

You can find out more about how United Atlantic Legal Services can help your firm through the investment adviser acquisition due diligence process by visiting our website. Please contact us, we would love to hear the plans you have for your firm.

5 Common Mistakes

1. Chasing Shiny Objects

While chasing the latest, greatest idea is not unique to the investment adviser space, it is far too common. We see investment adviser firm’s chase shiny new services, employees, products, systems and, of course, acquisitions without taking the time to consider that not all acquisitions are profitable and, in fact, many lead to disappointment and sometimes even litigation.

Principals of investment adviser firms, often over a round of golf or cocktail, will hammer out the next greatest acquisition with their counterpart, everyone leaving with dollar signs in their eyes. But, of course, the devil is in the details and rarely are these deals as amazing as they first appear. Take the time to slow down and think things through.

2. Forgetting About Culture

Principals of investment adviser firms may get along swimmingly. That does not mean that employees will get along or that there is cultural compatibility. We have seen “when cultures collide” too often, and we don’t want to see it happen after your acquisition. Here are some considerations:

  • Are your firm’s culture leaders compatible with those of the acquired firm? Will there be redundancies in this leadership position?
  • How does your firm communicate internally? Are there daily meetings, formal agendas, etc.? Will your communication style be well received by those at the acquired firm?
  • Does your firm have a stated list of values? Are these values in alignment with the acquired firm or can the acquired firm adapt (or will you have to)?

The culture issue is usually not a tangible one, but its importance cannot be overstated.

3. No Process

We discuss, in depth, United Atlantic Legal Services’ Adviser Assessment System later in this post. You can also download our whitepaper on the service by going here.

Whether you work with United Atlantic Legal Services or not it is important to have a well thought out plan for the legal and compliance due diligence process you will use when evaluating the investment adviser firm to be acquired.

When working with United Atlantic Legal Services, you will see that our Adviser Assessment System covers:

  • Acquisition Objectives – What are you and the firm to be acquired try to achieve through the acquisition?
  • Review of Publicly Available Information – We review all publicly available information. This means looking at the Investment Adviser Public Disclosure website and conducting extensive internet searches on the firm, and its principals and employees.
  • Interviews & Branch Visits – Speaking directly with key employees and making in-person branch visits are both great ways to really learn what is going on at an investment adviser firm. These interviews and visits can lead to revelations that wouldn’t normally be discussed until the acquisition is complete.
  • Internal Legal & Compliance Review – Do you know the contractual obligations of the firm you are seeking to acquire? Importantly, do you know the contractual obligations owed to clients of the acquired firm?

Whatever process you choose to use, make sure it is well thought out and detailed framework to build within.

4. “It’ll sort itself out” and Difficult Conversations

Dealing with sticky issues early is critical. We see far too many firms try to deal with sensitive matters at the last minute instead of early on in the process. Thus the “it’ll sort itself out” attitude is a recipe for failure, hard feelings and lost time and money.

What are some of the stickiest issues when it comes to investment adviser acquisitions?

  • Roles – Especially when it comes to the principals who will remain after the acquisition. There can usually only be one CEO, one Chairman or Chairwoman of the board, and so on. People who are accustomed to making all the critical decisions at a firm are often reluctant to give that kind of authority up.
  • Ownership – Who owns what, where and in what capacity? Most investment adviser firms we work with do not have a straightforward ownership structure. Often there are different types of share classes and entities through which those interests are held. Does everyone clearly understand what their future rights and obligations will be?
  • Client Agreements (Compensation) – A huge issue that many firms do not seem to want to confront early in the process is how clients of the acquired firm will be managed by the acquiring firm. Importantly, how will differing compensation matters be managed? For example, what will happen if the acquired firm has a lower fee structure than does the acquiring firm? What happens if it is the other way around? Of course, there are other aspects of client agreements that will have a material impact on how the accounts are managed. For example, are the fees billed in advance or arrears?

There are many other issues that need to be closely considered and the above is just a list of a few that we see arise frequently.

In a similar vein as ‘it’ll sort itself out” there are many difficult conversations that we see investment adviser firms ignore during acquisition due diligence process. These conversations are not going anywhere so it is best to deal with them directly and transparently. It is very hard to keep acquisition negotiations quite – to the extent that such conversations should even be kept quiet. Rumors will quickly begin to spread if you are not proactive about addressing them.

  • How do you plan to communicate to employees of both firms about the acquisition and how it will impact those employees?
  • How will you handle conversations with employees who will have to adjust to a new role?
  • Are there employees that who will be let go? If so, what is the process for their transition away from the firm?

5. Integration

We see dreamer founders negotiating acquisitions and leaving their implementer(s) far behind. Integration is hard even with the best thought out plans. There are many moving parts that happen at every investment adviser firm and managing them on a “normal” day is difficult enough. Imagine having to move entire firm over to those systems.

  • What systems are you moving the acquired firm to?
  • Do the firm’s use the same client relationship management platform?
  • How will the firm’s merge differing portfolio management systems?
  • Is there an expectation that systems will be run in parallel for a certain period?

List out your key systems and match them against those of the firm you are acquiring. Does it make sense? Is there a plan?

The Adviser Assessment System 

United Atlantic Legal Services has the experience and knowledge to guide you through the investment adviser acquisition process. United Atlantic Legal Services is confident that its Adviser Assessment System gives buyers and sellers of investment adviser firms confidence that they have identified legal and regulatory risks before the acquisition close. 

When working with you through the entire Adviser Assessment System, we have three goals mind: 

  1. Efficiency. United Atlantic Legal Services understands that our efficiency is beneficial to both our investment adviser clients and UALS. The more we understand about your business’s acquisition objectives early on, the more efficient we will be throughout the Adviser Assessment System
  2. Transparency. Ensuring that you understand where we are at in the legal and compliance assessment process at all times is a priority for us. We are very transparent with the process. We strive to help identify potential roadblocks and work closely with you to ensure that the legal and compliance acquisition assessments are as robust and detailed as you need in order to make an appropriate assessment of any risks.
  3. Tailored Solutions. Each investment adviser is different, and we work to ensure that your business’s acquisition goals are clearly reflected throughout the legal and compliance acquisition assessment process. We do not provide cookie-cutter assessment services. Rather, United Atlantic Legal Services provides the holistic, highly tailored Adviser Assessment System. United Atlantic Legal Services has designed this system to meet your specific business needs. 

United Atlantic Legal Services would love the opportunity to work with you and your firm during its legal and compliance acquisition due diligence process. We have the expertise and experience to navigate all types of investment advisers through the process. We look forward to learning more about you and your firm!

About Our Founder

Michael Rasmussen

Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets. 

Michael is also the founder of FinProLaw, an online learning platform where Michael has created several courses designed for investment adviser compliance professionals. These courses include: 

  • Investment Adviser Compliance Essential for Chief Compliance Officers 
  • Foundations of Investment Adviser Compliance 
  • What is a “Security”? 
  • Investment Adviser Marketing Rule 
  • Regulation A – Exemption from Registration 
  • Regulation Crowdfunding – Exemption from Registration 
  • Regulation D – Exemption from Registration 

Investment adviser firms who are also clients of UALS can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw website to learn more.