Client Attrition: How Many Clients Walk After Acquisition?

Client attrition rates are crucial to assigning M&A transaction risk in any industry. As the consolidation of wealth management industry looms, historical M&A transaction client attrition statistics lends to one conclusion: Wealth management practice acquirers face manageable hurdles. Nominal wealth management attrition rates do vary depending on M&A transaction type.

External Acquisition

On average, external acquisitions (an advisor previously outside the selling advisor’s practice purchases the practice) result in approximately 11% household attrition. External acquisition attrition rates are artificially inflated due to the buying advisor’s need to scale the new larger practice. To scale the new larger practice, buyers eliminate small accounts from the seller’s practice. This voluntary household attrition accounts for an estimated eighty-percent of all acquisition household attrition.

Surprisingly, external acquisitions generate a 110% AUM attrition rate. Positive AUM attrition may seem counterintuitive, however, if you consider the transaction participants: a senior advisor and an aggressive younger buyer, it should not. Senior advisors commonly reduce their work week to 20 – 35 hours and seldom engage in new household acquisition strategies or multigenerational planning. As enthusiastic buyers engage the seller’s client base more frequently and with a greater array of services, new assets are commonly uncovered.

Availability of financing for wealth management practices is largely dependent on cash flow coverage. Cash flow coverage for external acquisitions draws from the cash flow of two practices (buyer and seller). Consequently, coverage for external acquisitions typically exceeds that of an internal succession.

Succession (internal acquisition)

Frequently, successionary advisors have been working with the seller’s clients for a number of years prior to the senior advisor departing the practice. As a result, internal successions (advisor currently within the seller’s practice) yield minimal household attrition rates around 2%.

Younger successionary advisors generally have little to no incremental revenue to add to cash flow coverage, thus, on average, coverage ratios for an internal succession are less appealing to banks. This is mitigated by assumptions around low succession attrition rates.

Merger and Debt Restructure

Client attrition for mergers or debt restructuring (refinancing some or all existing practice obligations) is almost non-existent. In both transactions, advisors rarely depart the practice. In mergers, clients typically enjoy a favorable experience as the new practice integrates the optimum features of both practices. Clients are not aware of debt restructuring, resulting in no client attrition transaction risk.

M&A transaction client attrition risk statistics for wealth management practice M&A has impacted current practice valuations, yet many other factors impact valuations attained by each practice.