AUM Carve-Out Strategy, A BIG DEAL

Part 2 - The Art of AUM Monetization and Acquisitions.

AUM Carve-Outs, amongst the most important strategies used by elite Advisors, when done right, this application can offer huge advantages. The real trick to a successful Carve-Out is to be in control of the transition and whether you are the buyer or seller, it is critical to have a good understanding of the motivations behind the carve-out.

For Chairman’s Council readers, some elements of a Carve-Out have been discussed, before in the issue titled “An Acquirer’s Dilemma or a Lucrative Fortune?”:

What’s a Carve-Out

Carve-Outs are often offered in different forms and with conditions. The most common carve-out opportunities come as a result of a few common scenarios:

  • Sale of bottom quartile Assets - senior Advisors who segment their clients based on revenue and service levels, are often able to free up resources by selling lower performing and low revenue clients, i.e. the bottom quartile portion of their AUM that might not be as profitable to their practice.

  • Unmanaged - as Advisors move to discretionary offering, some choose to carve out remaining unmanaged households to streamline their revenues and better align with their managed account strategies. 

  • Lack of Alignment - while this could be linked to a number of different factors, the most common are situations where an Advisor / firm has changed their policy around household or revenue minimums etc., where there may be an opportunity cost or lower revenue drag by keeping these clients. Another scenario is that the Advisors has mostly transitioned to a fee based model portfolio operation and have remaining legacy accounts where the clients prefer a transaction type arrangement or are not interested in the model portfolio approach.

  • Personality Conflicts - from time to time, Advisors choose to carve out non core clients that are not considered core relationships to their practice, while this can be linked to various reasons, the most common is personality differences.

It’s astounding that few Advisors fully realize the opportunity, and often choose to fire the clients that are not a fit or allocates less resources or poorly service these clients to the point that they eventually throw in the towel and move on their own. This is often the case with Advisors that have not fully profiled and segmented their clients, by failing to do this, they overlook the tremendous drag that poorly aligned clients can have on their business, and forego the potential opportunity to generate an untapped source of cash.


  • Smart Advisor choose to pursue Carve-Out transactions when they can achieve the highest value for lower value AUM.

  • Be patient, never sell AUM in a weak economic environment and during market correction

As a Seller, AUM Carve-outs can be managed to create lucrative exits from assets/clients that may otherwise be low revenue producing or without a clear fit to your practice. Having a process is important - Use this simple 5 step process as a guide:

Take adequate time to be in a position of strength when you pursue the sale of AUM, set clear expectations by evaluating the parameters around the sale, i.e. have a process for selecting clients that will be included in the pool. Some Advisors go further by either operating a separate client service model for those clients that have been identified for a Carve-Out over a cool down period of time or hiring and nurturing an Associate to prepare for a lucrative sale.

In the Case Study - $45mil to $500 mil AUM in just 3 Years, the Advisor profiled, used a Carve-Out strategy to nurture an Associate by carving out a portion of his overall asset, to achieve his objective of segmenting the bottom 10% of his AUM and preparing it for sale to the Associate at a later date. His approached focused on mentoring and grooming a new Associate for about 2 years, with an intent to subsequently sell this portion of Assets to the Associate.  This technique produces the highest value, by continuing to earn a reasonable source of revenue on these Assets, while grooming a captive buyer who will be motivated to pay a premium price, because of their inherent attachment and familiarity with this group of clients.

In addition, as outlined in the “The Art of AUM Monetization and Acquisitions”, selling AUM can build strong advocates within your firm and branch, and elevates your profile by offering younger Advisor an opportunity to fast track their growth.

Sell AUM to Elevate your Profile

Segmenting clients is perhaps the number one advice given by high value business coaches etc. and most accomplished Advisors undergo the process of segmenting their clientele at some point. While this exercise is useful to clearly define service levels amongst different types of clients, segmenting offers tremendous value for dealmakers. They are able to clearly evaluate the monetization value of every segment of their business, and able to slice and group in many different ways. More notably they are able to identify segments of their business that are not a perfect fit to their longer term objectives. It is our view that focused Advisors sell the segments that don’t fit and sell them at a “premium”. The strategy involves finding a buyer that sees this as a pivotal asset to their own growth and would be willing to pay a premium. As an example, let’s say you run a discretionary fee only practice, but have a handful of stubborn clients that refuse to pay a fixed fee and instead continue to pay on a per transaction basis. While these may be good clients, they are not a true match to your long term practice model. As a result these clients would equate to a bit of a drag to your business and can be lower value clients in the long run. Revenues tend to be less predictable and they would require a completely different service offering and internal infrastructure. Over time these clients are not ideal for your practice, we suggest monetizing this portion of your AUM early. The reality is that there might be another Advisor within your firm / branch that may have a transactional focused business, and would be a better fit for that client in the long run. This is sometimes a great opportunity for you to help a young rookie advisor as well. Elevate the rookie advisors in your firm or branch by selling AUM to help them build their business, this will create advocates for your future transition to a competitor's platform (I’ve outlined the rationale here further down). New Advisors who were able to grow because you offered them an early opportunity to scale will forever be an ally, they will never seek to cannibalize your client relationships when you move to a competitor's platform.

The Carve-Out approach is recognized as an important procedure for many elite Advisors, because of the substantial benefit as a profitable mechanism to grow, while earning on non core AUM. The piece, Rotational AUM, the Flywheel of Elite Wealth Advisors vs. the Firm, suggest that some elite Advisors use this as a part of their flywheel, i.e. buy to grow fast, sell to unlock cash.

If you want to be a high performing Advisor you must re-invent the wheel.

Elite Wealth Advisors see the flaws in the firm’s old flywheel and some successfully focus on the opportunities that are created as a result of these flaws, exploiting these can be a profitable venture and but the techniques required are unconventional. The difference in mindset here is that, the elite Advisors hunt and grow internally, that is, they are not focused on attracting outside clients and AUM as a their primary focus like most of the industry. They grow their Revenues by acquiring assets internally from other Advisors seeking to retire or selling carve out AUM.

Motivations behind the carve-out

When acquiring, minimize your risks by doing some homework, take time to understand the Motivation of the seller. The first step is to fully assess the benefits of the transaction and, then get a full picture -

  • why are they selling,

  • Always look for blind spots - are they simply paring off the weakest part of their book, or are there regulatory, potential legal or other issues to overcome.

  • Is there a potential to scale and capture more assets from underserviced or overlooked clients.

  • What are their expectations around the sale, is it reasonable?

  • Has the Advisor done any work ahead of time to prepare these clients for a transition

  • Are there potential timeline issues, what is the priority of the selling Advisor

  • Are there other potential buyers, where’s your edge in the buyer universe.

Carve-Outs can be Risky, but so is riding a bicycle!

As a buyer of Carve-Out assets, there’s significant financial risk, reputational risk, time and operational resources required for successful completion of any acquisition. But when acquiring Carve-Out AUM from another Advisor, you must be especially prudent in your approach and carefully evaluate every element of the transaction, i.e.

  • why is the Advisor selling

  • who are the clients

  • is there a fit to your business

  • what are the risks associated with the transaction

  • is there a compelling value

  • how will this Carve-out AUM be integrated into my practice

  • do I have adequate resources i.e. Administrative staff to complete the integration in a timely and efficient manner

  • what the actual value of the assets

  • how do I pay for this acquisition.

A bad carve-out can be financially damaging to the acquiring Advisor, while at the same time it can carry great reputational damages to the Advisor selling. However, clear and patient planning can alleviate much of the anxiety around these transactions. Due Diligence is Essential:

Buyer Due Diligence

As a buyer, it’s important to understand the rationale behind the carve out, seek clarity around each client, if possible take some time to review the files ahead of presenting a proposal. 

To achieve success with carve out acquisitions, the prospective buyers must overcome any uncertainty or concerns in their initial assessment.

Be in a position to evaluate each individual household in the carve-out based on the future potential revenue stream that can be generated, while taking into consideration the anticipated maintenance and resources that would be required individually.

  1. Know the Clients - Get a clear sense of how the client fits with your business model, or whether there may be opportunities to access even more inflow by offering better quality of service for the client. What are the revenue sources, have there been any transitions where the Advisors has earned a significant initial payout leaving lower prospects for ongoing revenue etc. Profile every household based on Assets, revenues, profession, network links, location etc.

  2. Know the Value of the Assets - determine the best value for each household in the carve out, discount the values for any uncertainty, discount values for resource intensive households.

The assets should be considered in this way, get a good sense of the multiples being paid for AUM in your firm, this can be used as a guide.

  • The Natural Fit Clients with potential for growth can be valued based using the market rate multiples.

  • The May be a fit Clients should be discounts, the selling Advisor might not have an affinity to these clients, due to difference in jurisdictions and having not established relationships.

  • The Not a fit Clients, due to the uncertainty of future revenues from these clients, it’s often better not to pay for these. Offer to pay a reasonable multiple for the others that have better alignment and if there’s a fit for this group, suggest that you will take them off the Advisors hands as a favor, chances are these are problem clients that the Advisors would rather drop anyway.  The emphasis here should be to evaluate based on the information available on the client and future value of the revenue stream. 

Pro tip - Never base your valuation solely on past revenues. 

The current demographics of the Wealth Management industry offers an incredibly unique and favorable circumstances for emerging and elite Advisors to grow by Acquisitions. Advisors who are conscious of these factors, stand to grow rapidly with a rare potential to earn unpresented amounts in comparison to the average Advisor.

the demographics are changing, it's estimated that one-third of Advisor in the US will be retiring within 5 years. There is a significant imbalance of older Advisors in the industry, over half of the industry now stands within 10 years of retirement. This presents a compelling opportunity for the entrepreneurial Dealmaker Advisor.

While the common rhetoric is that when it comes to AUM acquisitions there are far more buyers than seller, this is far from the truth. In reality, there are many planned transitions of AUM assets that are not typically not part of the statistics i.e. many of the largest Advisors, the elite, plan their transitions long in advances. Look around your firm, you can probably think of at least few Advisors who will likely retire in a year or two and have partnerships in place or have already hire Associates that will eventually acquire the practice. But, think harder, how many Advisors have you seen retire over your career, in almost every case their Business will be sold to another Advisor. The point here is that everyday there are AUM sales and carve-out happening around you, if you are not intimately involved in these transactions they fly under the radar. Most Carve-outs are never shown in statistics around AUM sales, these opportunities are not typically advertised, you have to establish a network around the asset to be in a position to access these opportunities.

In the Wealth Management business, the largest pools of Assets around you are already on the firm’s platform, and understand that these books of AUM are changing hands, want to grow a monster business, you need to start paying attention and understand the flow of Rotational AUM, be a part of these transitions and transactions. The opportunities are there for the taking.

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Rotational AUM, the Flywheel of Elite Wealth Advisors vs. the Firm - In Wealth Management, there are two flywheels you need to know well - How the firm makes money and how the Advisor makes money!

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