Acquired net new money

What Is Acquired Net New Money?

Acquired Net New Money (ANNM) represents the total value of client assets or funds gained by a financial institution or advisory firm through inorganic growth strategies, primarily mergers and acquisitions (M&A) or the recruitment of financial advisor teams who bring their client books with them. This metric, central to financial reporting and wealth management, reflects the immediate impact of strategic transactions on a firm's total asset under management (AUM). Unlike organic growth, which stems from existing clients or new client acquisition through internal sales efforts, Acquired Net New Money quantifies growth derived from external business combinations or talent recruitment. It is a key indicator of a firm's ability to successfully integrate new clients and assets into its existing operations.

History and Origin

The concept of tracking Acquired Net New Money emerged as the financial services industry, particularly wealth management and asset management, underwent significant periods of consolidation. As firms sought to expand rapidly, gain market share, and achieve economies of scale, mergers and acquisitions became a prevalent strategy. This trend intensified following deregulation, such as the Gramm-Leach-Bliley Act of 1999 in the United States, which allowed for broader integration of banking, securities, and insurance activities, further fueling M&A activity within the sector.⁵, ⁶

The increased mobility of financial advisors, often bringing their client investment portfolio with them when changing firms, also necessitated a distinct metric to track these external inflows. Regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA), have even introduced rules to address client asset transfers associated with recruitment practices, highlighting the importance and potential complexities of these client movements. For example, FINRA Rule 2273, effective November 11, 2016, requires firms hiring registered representatives to provide an educational communication to former customers when assets are transferred, emphasizing considerations and potential costs.³, ⁴

Key Takeaways

• Acquired Net New Money quantifies assets gained through external events like mergers, acquisitions, or advisor transitions.
• It is a critical metric for assessing inorganic growth and the success of M&A strategies in financial services.
• The calculation typically involves the total assets onboarded from the acquired entity or transferring clients, net of any immediate client attrition.
• ANNM is distinct from organic growth, which results from new clients acquired through internal sales or increased investments from existing clients.
• High Acquired Net New Money can indicate successful due diligence and integration efforts following an acquisition.

Formula and Calculation

The calculation for Acquired Net New Money involves assessing the total assets brought in through an acquisition or advisor team transfer, less any assets that are immediately withdrawn or not successfully transitioned.

The conceptual formula can be expressed as:

• Total Assets Acquired: This represents the cumulative value of client AUM that an acquiring firm or a new recruiting firm immediately gains from the target company or the transferring financial advisor's client base.
• Assets Lost Post-Acquisition: This accounts for any client assets that are not retained after the acquisition or transition. This can occur due to clients choosing not to transfer their investment portfolio to the new firm, or due to immediate withdrawals. Effective customer retention strategies are crucial to minimize this loss.

Interpreting the Acquired Net New Money

Interpreting Acquired Net New Money involves more than just looking at the raw number; it requires understanding the context and quality of the acquired assets. A significant positive ANNM figure indicates that the acquisition or recruitment initiative has been successful in immediately expanding the firm's AUM. This suggests effective client acquisition through external channels and potentially strong initial client retention of the acquired base.

Conversely, a lower-than-expected or negative Acquired Net New Money figure could signal challenges in the due diligence process, poor strategic fit, or difficulties in the integration phase. It might indicate that a substantial portion of the acquired clients chose not to transfer their assets to the new entity, perhaps due to concerns about service changes, fee structures, or a lack of trust in the new firm. Firms typically analyze ANNM in conjunction with other metrics, such as client retention rates post-acquisition and the long-term financial performance of the acquired assets.

Hypothetical Example

Imagine "Global Wealth Partners" (GWP), a large wealth management firm, acquires "Local Advisory Services" (LAS), a smaller independent practice. Prior to the acquisition, LAS managed client assets totaling $500 million.

1. Initial Acquisition: GWP officially completes the acquisition, bringing the $500 million AUM from LAS under its umbrella. This $500 million is the "Total Assets Acquired."
2. Client Transition Period: Over the next three months, GWP begins the integration process, onboarding LAS clients and their investment portfolio. During this period, 10% of LAS's clients, representing $50 million in assets, decide not to transfer their accounts to GWP, perhaps due to conflicts of interest or a preference for a smaller firm.
3. Calculating Acquired Net New Money:
   • Total Assets Acquired from LAS: $500 million
   • Assets Lost Post-Acquisition: $50 million
   • Acquired Net New Money = $500 million - $50 million = $450 million

In this scenario, GWP's Acquired Net New Money from the LAS acquisition is $450 million. This metric provides a clear picture of the net asset inflow directly attributable to the acquisition, distinguishing it from GWP's organic growth through its existing sales channels.

Practical Applications

Acquired Net New Money is a crucial metric with several practical applications across the financial services industry:

• Business Valuation: When a firm is considering acquiring another company or a team of financial advisors, projected Acquired Net New Money is a significant component of the target's valuation. It directly impacts the potential revenue streams and economies of scale the acquiring firm expects to gain.
• Strategic Planning: Firms use ANNM to evaluate the success of their inorganic growth strategies. Consistent, positive Acquired Net New Money indicates effective mergers and acquisitions and recruitment efforts, helping leadership decide on future expansion tactics. Financial institutions, for instance, continue to see consolidation as a strategic driver.²
• Performance Measurement: Management teams and investors often track ANNM as part of a firm's overall financial performance. It provides insight into how well external growth initiatives are contributing to the firm's overall AUM growth, alongside organic growth.
• Due Diligence: During the due diligence phase of an M&A deal, potential Acquired Net New Money is rigorously assessed. This involves analyzing the stability of the target firm's client base, historical customer retention rates, and the likelihood of successful client transitions.
• Competitive Analysis: Comparing a firm's Acquired Net New Money to its competitors can reveal insights into market positioning and the effectiveness of different growth strategies within the industry.

Limitations and Criticisms

While Acquired Net New Money is a valuable metric, it has limitations and is subject to criticisms, particularly concerning the quality and sustainability of the acquired assets:

• Client Attrition Risk: A primary criticism is the potential for significant client attrition post-acquisition. Even with thorough due diligence, some clients may choose to leave, eroding the initial Acquired Net New Money. Academic research suggests that mergers and acquisitions can sometimes lead to a decline in the performance of merged entities, partly due to the loss of clients.¹
• Integration Challenges: Successfully integration new clients and operations can be complex and costly. If integration is poorly managed, it can lead to client dissatisfaction, increased operational expenses, and a failure to realize anticipated synergy from the acquired assets.
• Purchase Price vs. Value Realized: A high Acquired Net New Money figure doesn't automatically equate to a successful acquisition if the purchase price was excessive or if the long-term profitability of the acquired assets is low. The focus should be on value creation, not just asset accumulation.
• Measurement Period: The "net" aspect of Acquired Net New Money is highly dependent on the measurement period. Immediate losses might be captured, but subtle, long-term customer retention issues may not be evident for months or even years.
• Quality of Assets: The metric does not inherently account for the quality or profitability of the acquired assets. A large influx of low-margin assets may boost AUM but not necessarily contribute proportionally to the firm's bottom line.

Acquired Net New Money vs. Net New Money

Acquired Net New Money and Net New Money are distinct but related metrics used in the financial services industry, both measuring asset flows but from different sources:

While Acquired Net New Money quantifies the assets gained specifically through inorganic growth, the broader term Net New Money encompasses all net asset inflows, which can include both organic growth and the impact of Acquired Net New Money once those assets are fully integrated into the firm's regular reporting. A firm aiming to grow its AUM will typically focus on maximizing both its organic and acquired net new money contributions.

FAQs

What is the primary difference between organic and acquired net new money?

Organic growth in Net New Money comes from new assets contributed by existing clients or entirely new clients acquired through a firm's direct sales and marketing efforts. Acquired Net New Money, conversely, comes from external sources like the purchase of another firm or the onboarding of a financial advisor team with their client book.

Why is Acquired Net New Money important for a financial firm?

It is important because it quantifies the effectiveness of a firm's inorganic growth strategies. A positive Acquired Net New Money indicates that mergers and acquisitions or advisor recruitment efforts are successfully adding to the firm's asset under management (AUM) and expanding its market share.

Does Acquired Net New Money account for clients who leave after an acquisition?

Yes, the "net" in Acquired Net New Money implies that it considers assets gained minus any assets that are immediately lost due to clients choosing not to transfer their investment portfolio to the acquiring firm. This highlights the importance of effective integration to minimize client attrition.

How does Acquired Net New Money relate to valuation?

Acquired Net New Money is a critical component in the valuation of a target firm or advisory practice. Buyers estimate the potential ANNM to project future revenue streams and justify the purchase price, as these assets directly contribute to the acquiring firm's overall AUM and revenue base.

What factors can negatively impact Acquired Net New Money?

Factors that can negatively impact Acquired Net New Money include poor due diligence leading to unforeseen client churn, inadequate integration processes that alienate new clients, conflicts of interest, differing fee structures between the original and acquiring firms, or a lack of trust in the new entity.