Like any maturing industry, the financial services industry realized somewhere along the way that joining forces was a powerful means to grow and grow quickly. Iâm simplifying tremendously, of course, as a number of factors created this perfect storm that has paved the way for the sharp increase in M&As among financial advisory firms. Iâll get to that in a minute, but it is a safe assumption to say that today M&A is a key consideration for advisors whether itâs part of a development strategy, succession plan, or retirement plan.
Broken Records: The Current M&A Landscape
Rather than look too far behind us, letâs examine the numbers today. According to M&A consultants, ECHELON Partners, a record number of M&A dealsâ168âclosed in the advisor space in 2017, representing a 22% growth over the previous record set in 2016. Aside from a fifth straight year of record highs in M&A activity, the size of the deals has also increased, with average acquisitions involving wealth managers exceeding $1.01 billion in assets under management.1 In 2018, Both ECHELON Partners and another leading M&A consulting firm, DeVoe & Co., reported a record-setting boost in the first quarter (DeVoe recorded 47 deals2 and ECHELON, 46), and both firms believe that trend will continue.
These numbers may not seem terribly significant if you consider there are 12,172 SEC-registered advisors as of April 1, 2017,3 according to a report from Investment Adviser Association and National Regulatory Services (NRS). But these figures donât consider deals that go unreported or the firms either starting to consider M&A as part of their growth strategy or the ones already in negotiations. Speaking from experience, the last firm we acquired had been through several previous transactions that were not recorded and we know this isnât unusual. Rather than note just the firms who have reported deals, the question to ask is, how many of those 12,172 firms are considering M&A activity over the next 5â10 years?
With M&A becoming such a hot topic and only getting hotter, itâs important to understand how and why we got here. There are a handful of contributing factors, and while these are certainly not inclusive, here are a few based on our personal experiences, interviews with our peers and from research firms like DeVoe & Co. and ECHELON Partners.
- Competition. It is an extremely competitive market out there today, and that should not come as a surprise. The financial services industry is maturing and has been highly profitable for many, many years, with the demand from wealth clients far outstripping the number of advisors available to serve them. In addition, todayâs client is more tech-savvy, informed, and interested in being involved in their finances. Theyâre also shopping around online at multiple firms. While that means the more recognized value of wealth managers, it also means the rise of robo-advisors and DIYers, making it difficult to compete when so many online tools are available for free or next to nothing.
- A Tough Regulatory Environment. The ever-changing regulatory climate is one that takes serious resources and skills to navigate successfully. The challenges we face today with compliance and regulations are time-consuming and stressful, and the liability for giving advice is not unlike an obstacle course.
- High Valuations. This ongoing bull market (as of Q3 2018) has created a very attractive environment for advisors. RIA valuations are high as are the number of interested buyers who see short and long-term benefits of scale and depth. Combine that with many wealth managers eyeing retirement and succession, and everyone sees a winning solution.
- The Allure of More Independence. An important component of M&A activity involves the breakaway firm. Breakaway activity has continued to gain momentum through 2018 as pressure mounts to move due to increased Broker Protocol defections. According to ECHELON Partnerâs RIA M&A Deal Report, there has been a 6% increase in breakaways in the first quarter of 2018 compared to the fourth quarter of 2017.
- The Allure of Less Independence. Perhaps an outcome of some of the other factors, some advisors are finding the evolving RIA landscape overwhelming and difficult to sustain, especially if there is no succession or retirement plan in place. Riding out market volatility can get tiresome, technology can be daunting to stay current, and recruiting and retaining advisors can be challenging. There is power in numbers and partnering with others or handing over control provides those advisors with peace of mind that their firm and their clients will be in good hands. It also offers the financial security to step away when the time comes.
Whatever a firmâs reason for considering and entering into the M&A waters, the question often comes down to growth. Organic growth has gotten harder in recent years, and advisors have had to get creative to stay competitive. Joining forces, acquiring or selling are all viable options to achieve those growth goals in one transaction. But itâs not like going on a blind date. The amount of screening, planning, and interviewing involved is extensive on the front end and should continue during and after the M&A process. A firm also needs to consider how to prepare, position, and present its best selfâfrom its people, its organization, its processes and of course, and its technology resources.
Technology: A Key Component of M&A
For many advisors in smaller or even mid-sized firms, it only takes a handful of missteps during a merger or acquisition to jeopardize their business. A significant and often overlooked component to a successful RIA merger or acquisition is the thoughtful integration of technology.
Technology is often a word that advisors use with purpose but without a deeper understanding of the impact it truly has on our business. Itâs a nebulous concept, morphing, and shifting with every day, making it harder and harder to know when to leap on to something new. Is it hardware? Software? Apps? You may do your research and feel good about committing to a system today, but what happens tomorrow when the next âground-breakingâ fintech is unveiled? Unfortunately, this never-ending cycle of shiny new things can become paralyzing, and the next thing you know, youâre using horse and buggy technology that makes it twice as difficult to catch up. Pairing that with a second firmâs technology in a merger and acquisition can be disruptive and downright painful. Like it or not, if youâre not leveraging technology and exploring new ways to attract business organically you are going to get left behind in more ways than one.
There are all sorts of guides on the market on how to approach M&Aâthe art of the deal, the meeting of the minds, comparing philosophy, and having the right conversations, looking at balance sheets and numbers and growth and all that. But there is no guide for how to navigate technology integration between two firms. Why is that? Our industry is a unique animal, but the reasons we might overlook technology are fairly common.
- We Take It for Granted. We live in a world now where things are just supposed to work. Remember the âEasy Button?â You turn on your computer, you log in, and an enormous amount of complex data is at your fingertips. That feeling of security extends to our personal lives, too. You can check your homeâs security and temperature with an app. You have weather, music, and an encyclopedia of random knowledge on-demand courtesy of our virtual assistants, Alexa and Siri. This isnât generation-based, either. My 83-year-old mother is on Facebook sharing videos with the ease of a millennial.
- We Are in the Business of People First. Our industry prides itself on being people-focused. We like to think we are the opposite of automated. Except weâre not. Technology helps us accomplish many of the things that our clients find valuable. Real-time financial advice based on the absolute latest numbers. Information on-demand. Reports that are easy to generate and understand. And historical data on our clients and their families that help us get to know them and serve them better.
- Technology Growth Is Organic. And lastly, technology is a tricky, ever-evolving animal. Itâs not one and done, like signing a lease on a bigger office space and turning on the lights. Youâre never done growing along with your technology, and no two firms grow the same. It touches every aspect of our business, evolves gradually and usually out of necessity. I ...