Recently, findaWEALTHMANAGER.com reported a big uptick in “relationship breakdown” prompting clients to change provider. Here, the firm's co-founder Dominic Gamble explains why he thinks much of the blame can be laid at the door of M&A.

This publication is re-issuing some of the strongest articles of the past 12 months as the holiday season approaches.

Recently, findaWEALTHMANAGER.com reported a big uptick in “relationship breakdown” being cited by clients as the reason they want to change provider. Here, Dominic Gamble, co-founder of the matching service, speaks exclusively to WealthBriefing about why he thinks much of the blame can be laid at the door of M&A.

The M&A merry-go-round has spun particularly fast over the past year or so in the wealth management industry, but while this uptick will have some - like management consultancies and headhunters - rubbing their hands, it would seem that the rising number of deals is also causing client dissatisfaction levels to soar.

The traffic coming to findaWEALTHMANAGER.com comprises a mixture of those new to wealth management and existing clients who are looking to diversify or change their provider. But while the number of clients looking to leave has remained pretty stable over the past year, the amount of clients citing relationship breakdown has doubled to 52 per cent in the last six months. This, according to Gamble, is a direct result of increased M&A activity causing service standards to slip.

M&A is of course a natural feature of business and this is certainly not the first flurry of it the wealth management space has seen (although the last period of such heightened activity was probably around 10 years ago). The biggest deal of recent times has been Julius Baer’s purchase of Merril Lynch’s non-US wealth management business, but we’ve also seen Credit Suisse snap up Morgan Stanley’s EMEA wealth management unit, Schroders buy Cazenove and a merger between Quilter and Cheviot.

For Gamble, the drivers behind this surge in M&A are inextricably bound up with why clients can suffer as a result of such deals – namely, a neglect of the relationships which lie behind the numbers.

While there are still some independent, privately-held wealth managers around many of the prominent names are either publicly listed or owned by private equity groups, and this number is likely to increase further since investment banks and private equity players are rapidly coming round to the view that wealth managers are very stable revenue generators and attractive (not to mention prestigious) additions to a portfolio. With the emphasis always then being on maximising returns for shareholders or owners cost-cutting can take its toll and cultures can clash, explained Gamble. Basically, there is a risk - particularly in an M&A scenario - that boards and management lose sight of the fact that profits are predicated on high-touch service and the personal relationships forged by front-line staff, and that therefore keeping staff happy is key to retaining clients.

"A headhunters’ paradise"

To avoid role duplication, large-scale job cuts are the usual result of a merger or acquisition and this “looks set to continue” over the next few years, said Gamble. (M&A activity is widely predicted to continue over that period at least, driven in part by falling valuations: according to Scorpio Partnership, valuations have fallen from four per cent of assets in 2010 to 2 per cent last year and will likely fall to 1.5 per cent in one or two years.) But aside from layoffs, there are many other changes advisors going through an M&A transition are likely to see – and which they probably won’t like – meaning that staff exoduses are common. “Those on the ‘sharp end’ often see changes which could mean investment managers and advisors leaving because they don’t like ‘the big machine’ and hark back to the old culture they used to have - so they go to a different firm,” said Gamble. “It’s a headhunters’ paradise.” Furthermore, he notes that even if a disgruntled relationship manager does stay put the client is likely to pick up on the fact that they are unhappy (they may even discuss it) and this will also cause a client to feel restless. “If the client is thinking, ‘Oh God, what’s going to happen?’ then the wealth manager is probably going to lose the client, if not the banker, through mismanagement. That’s a bad situation for everyone to be in.”

Another change which is often the result of mergers or acquisitions, particularly when a small player is swallowed up by a larger one, is that a “very organised, siloed approach” is imposed, he continued, which can make both advisors and clients very unhappy. “A lot of the big global private banks are very strict about siloing teams and clients, the most common being by nationality, the other common one being by size of client, and that can mean that clients get thrown around in a big, more organised institution and a bigger, more organised setup between different teams and different relationship managers,” Gamble said. (Industry figures have previously spoken to this publication about the tendency of very large wealth managers to “shunt” clients - particularly lower value ones - around teams and advisors for their own convenience and with little heed to how clients feel about it.)

In fact, Gamble’s view is that too little heed is paid to how clients and advisors feel about changes in general and there needs to be more recognition that “wealth management is a relationship business that works psychologically from both sides - the client side and the relationship manager side”. So while it may well be necessary to change client-advisor pairings in many cases, firms need to be aware that when change comes often “it’s immediately a negative”, he said. After a long period together the client may have come to view the advisor as a quasi-friend, meaning that they may actually be quite upset (and perhaps slightly resentful) when allocated someone new. Even if they are happy to have a new advisor, Gamble points out that the new relationship manager will inevitably face an uphill struggle. “When you’ve got a new contact person coming in to a legacy relationship it’s very difficult for the new person to pick up where the other person left off – in terms of relationship, understanding the client and how to deal with that person,” he said. “Change causes disruption and the wealth manager then has to work doubly as hard to get back to where they were.”

Don’t forget the positives

That said, change isn’t always a negative. Clients and their circumstances will evolve hugely over time (as will a relationship manager themselves) so it could be that a shake-up coming out of a merger or acquisition could be a good thing in terms of viewing the client with fresh eyes and seeing if perhaps there might be a better fit within the organisation for them. The key, according to Gamble, is offering clients choice about who services them, and he joins several industry commentators who are advocating this and better client-advisor matching in general.

While wealth managers in the midst of a transition will want to get clients settled with their new advisors as soon as possible, Gamble believes that it really pays for firms to put just a little extra thought into the matching process and make it clear to clients that they do indeed have a choice (the psychological benefits of this need hardly to be stated). Far from necessitating a full-on psychometric assessment or the like, he believes that, “you could get to a good match by asking the client just a handful of variables…that could be an age match, it could be a sex match, an interests match or a profession and expertise match.”

Not a "lottery"

Interestingly, Gamble notes that several of the more forward-thinking wealth managers on his firm’s books are in fact putting this effort in before prospects are even approached and are being very thoughtful about how they distribute referrals around internally; what’s more, such firms are enjoying much better conversion rates. “We see that time and time again: the firms who take care on the matching have better chances of landing the client,” he said. “Just having a lottery on which advisor calls a client or meets a client for the first time is not a particularly well-thought-out strategy.”

So, firms going through a transition and which are having to reassign clients should avoid a “lottery” approach and should perhaps use this time of change to attempt more accurate client-advisor matching. But what else should they be thinking about?

For Gamble, the key to pulling off a merger or acquisition in such a way as to minimise the loss of both client and advisors is good internal communication. There are several examples where M&A marriages have gone slightly sour and he notes that this has usually been down to either a) a big culture clash, such as between US and Swiss firms and/or b) one firm suddenly being “ruled” from afar (perhaps from another country) and communication being solely in the form of management edicts.

A tough journey

“Mergers and acquisitions are very tough and it’s hard for the acquirer and the acquiree to get on the same page very quickly. You have to have people at grass roots level within the firm making sure that the communication with clients is slick and smooth,” Gamble said. “It won’t go well if the communication comes purely from the top, especially if it’s in another country and it’s ‘rules-based’ communication.” Quite apart from the fact that nobody likes the sudden imposition of change by “strangers”, he rightly points out that relationship managers are the primary interface between client and institution, therefore advisors have to be “on-message” and ready and willing to reassure clients. Indeed, there is an element of needing to “sell” the change to clients and advisors will hardly be able to do this if they haven’t been “sold” it themselves first. Staff buy-in, as ever, is essential to any change programme.

While change can be difficult, both practically and psychologically, M&A deals can of course represent change for the better for both advisors and clients. As Gamble points out, “very often with two brands coming together clients have better capabilities, better platforms, maybe better reporting and a deeper pool of expertise, and that is important.” However, he notes that this is only really likely when it is two “like-minded” institutions coming together. (As quite similar firms, Cheviot and Quilter may well come to mind here as well-matched partners.)

Seb Dovey, managing partner at Scorpio Partnership, agrees and notes that his firm’s M&A research has found that client satisfaction or dissatisfaction levels are “very deal specific”. “In some cases the M&A could be considered an upgrade by the client (better products, better rates, better expertise), while for others it is a downgrade (uncertainty, cost reductions meaning layoffs, an adjustment in the business model focus etc),” he said. “The point is that M&A does not implicitly mean dissatisfaction, based on our insight research. However, it is dissatisfaction that gets heard much louder than satisfaction.”

M&A don’t necessarily equate to unhappy clients or advisors, but there are enough cases where they have done to warrant a very well-thought-out approach to managing – and communicating - the change. In Gamble’s view, part of the solution is “being cognisant that it is a relationship game and it’s not necessarily a business that you can drive profitably just from spreadsheets. “I think that’s particularly pertinent when it comes to different cultures and different nationalities coming together,” he continued. “Wealth management is not as formulaic as maybe some business owners would like so I think the relationship angle is by far and away the most important when you’re in an M&A environment.”

Final advice

Although M&A deals can entail a rapid root and branch overhaul of operations and brand, Gamble’s final piece of advice is for firms to try to maintain as much normalcy for clients as possible. “Yes, there’s going to be change in the branding, yes there are going to be some structural things behind the scenes, but trying to keep the status quo from the client’s perspective is very, very important,” he said.

Maintaining the status quo for clients, while also selling them on change, and unifying a disparate and perhaps unhappy workforce while also affecting a huge change programme, is clearly a monumental task beset with difficulties. There have however been some big winners – like UBS – to have emerged from a series of acquisitions and mergers over the years and it is clearly possible for M&A marriages to work in the long term. It is hard to predict which will be the next big M&A deal in the wealth management industry and which kind of players will be involved. What is certain however is these firms’ management teams face a difficult journey ahead – and that applies whether the deal is a “shotgun wedding” or a much more considered union.