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As economic and geopolitical uncertainly churn financial markets, there’s at least one point of consensus: There has never been a greater need for independent financial advice, according to the vast majority of speakers who weighed in on the state of the RIA industry.
“I'm passionate about this RIA space, having been in it for 30 years,” said Bluespring Wealth Partners President David Canter. “I think it’s a self-regenerative space in terms of the number of folks that are attracted to the model. I think there's a bull market for advice and I've said this before, because the number of consumers that are seeking this model as well as the number of advisors that are attracted to the model just keeps going up and to the right.”
“There is a bull market for advice,” agreed Pershing X President Ainslie Simmonds. “I think the challenge is that we as an industry have sort of stayed in the stratosphere of the people that we are able to serve because there are some structural issues in going lower into the market. And I think if we can get it right, we can truly achieve our kind of collective mission of helping more people with their money.”
“This is the opportunity for us to demonstrate our greatest values to our clients, without a doubt,” said Wealth Enhancement Group CEO Jeff Dekko. “And I think both as firms and individuals in this industry, this is where you help people get through this time and make the right decisions.”
While there have been some reports of mergers and acquisitions activity slowing in the RIA space, active acquirers and transaction experts expect to see demographics, private equity inflows and the need for sophistication and scale drive ongoing market activity.
“There’s chapter one M&A today,” said Dekko. “That’s when you have a lot of consolidating forces and a lot of capital coming into the space, and you’ve got technology that’s sort of giving leverage on scale. I would say 15 years ago, there wasn’t really a lot of scale benefit to larger RIAs. I think that has changed dramatically and will continue to change going forward.”
Dekko, an active acquirer of RIAs, also pointed to increasingly onerous regulation requirements and said larger firms tend to be audited "differently."
“Chapter two is when you start to see larger firms consolidate,” he said.
“The window is wide open,” said John Langston, a founding managing partner at Republic National Group, a financial services-focused investment bank. “If you want to accomplish a transaction, whether it's on the buy side or sell side, there's every opportunity.”
Allworth Financial CEO Scott Hanson pointed out the number of private equity-backed firms in the space have essentially quadrupled over the last several years.
Bluespring's Canter noted the proliferating options buyers and investors present to sellers in terms of deal structures.
“It's still somewhat early innings in the M&A space,” said Brandon Kawal, co-founder and senior partner at business management and transaction advisory firm Advisor Growth Strategies. “I do think there’s going to be a natural ebb and flow that we'll see over time . . . And it might just take a little bit longer. But I think there's a lot of strategic rationale driving the M&A market that's not just valuations, it's not just EBITDA or revenue—it's resourcing, it's scale, it's succession.”
Among the growing number of M&A options available to RIAs, the platform partnership model—in all its variety—has emerged as the most attractive to breakaway advisors, as well as firms looking to partner with an eye toward the benefits of scale.
Bluespring’s David Canter broke down what he views as the eight primary options potential sellers have in today’s M&A market: doing nothing; selling internally; selling a minority stake; taking on an uninvolved capital provider; completing a “cross-town merger” with a similar or complementary firm; going directly to a private equity provider; or joining a fully or of partially integrated platform firm.
Experts agreed platform partnership has emerged as the most attractive to interested sellers, and that there are an ever widening array of options within those models.
“The search for platform services is going to continue to drive folks to partner,” said Canter. “And the great thing is, unlike 2016, there's a lot of choice out there. So, I think it's good for advisors, I think it's good for consumers and it's good for those that are executing in this space.”
According to Kawal, upwards of 80% of deals are being done by platform integrators—firms like Summit Financial, Commonwealth Financial and Steward Partners—each of which has a slightly different flavor of deal structure, but all of which essentially take on back-office functions and provide services in return for firm equity.
“There are degrees of integration,” he said. “Some are very strict integration, some are more flexible integration and there's degrees of distance that they're putting between them and their competitors. And then there's flexible platforms that are more maybe minority, small majority. The buyer universe is diversified around economics, but also operating models, and we’re starting to see more.”
Virtually all speakers pointed out that firms intent on growth and scale can attract better talent, provide more enhanced services to clients and can command higher multiples in the marketplace.
“The higher your growth rate, the higher a multiple that someone's absolutely going to be willing to pay for you,” said Schwab Advisor Services Managing Director Tom Bradley. “I’ve worked with a lot of the private equity firms and they are 100% looking for growth.”
“Growth is the most important thing,” said Michael Wunderli, managing director for Echelon Partners, an investment bank serving the financial services industry. “If you're ever thinking about selling the company or really improving your enterprise value, go after that growth. And that doesn't just mean try really hard to land those whales to get more assets. What really drives growth are systematic practices that regularly generate a pipeline and predictable amount of clients that will be onboarded. And buyers absolutely love that.”
“Where growth is on a hockey stick curve," said Gabriel Garcia, the managing director of advisor service at custody and fintech provider SEI, is the spot where "your talent is growing, you're attracting new clients, you're delivering new sets of capabilities and services.”
Excel spreadsheets and multiple logins are becoming a thing of the past as financial technology continues to make advisors’ lives easier, though perhaps not as fast or efficiently as some advisors would like. And now, the possibilities created by advancing artificial intelligence programs are poised to change the game even further.
“There's some really interesting stuff that's being done specifically on the technology side, which is one of the things we were most excited about when launching our business,” said ShoreHaven Wealth Partners CEO Mike Durso.
“We operate like a 50 to 75 person firm which is incredibly scalable and efficient in the way we can operate for our clients,” he said of his five-person team. “I think the other thing that's really interesting is the integration between all of these platforms. The ability to pull in from eMoney or Riskalyze directly into Black Diamond so that when a client sees something they don't see it as five different pieces of technology.”
“Today the technology is starting to come online,” said Morningstar CEO Kunal Kapoor. “I think tax personalization, as well as risk and personal preferences, will start playing to that in a very meaningful way—and you can start to do that at scale.”
“With something like direct indexing, that change is very, very meaningful,” he said.
Kapoor expects artificial intelligence to have a positive impact on the industry at large.
“The use cases are manyfold,” he said, noting that Morningstar has developed a chatbot able to return data points on the company’s entire catalog of research in a matter of seconds.
“I think it will allow all of you to focus on things that matter,” Kapoor said. “It'll continue to make it easier for you to build to the portfolios that you want. It probably will help you with your clients as well. I'm very bullish on the technology, precisely because it takes away friction and allows you to go through so much so quickly.
“There's going to be a lot of evolution of the technology in the next month, two months, three months,” he said. “And so, we're going to see where it goes. But I'm incredibly optimistic.”
To meet the evolving needs of clients, wealth management is becoming less less about their money and more about their lives.
“I think the client experience is changing dramatically,” said Reed Colley, CEO of Summit Wealth, an all-in-one technology platform for wealth management firms. “Every single client is moving away from [focusing on investment returns] and now they want to know how you can help them in their lives.”
“What can you help me do that's going to allow me, my family and those I care about to really connect things to things that I believe in and that are important? We’ve heard about personalization now for a few years, digitization, but we talk about this as a humanization,” he said. “There now needs to be more platforms and more features and functionality from partners like custodians that allow you to be able show your accounts what you can do for them, let them hear that you understand who they are, what they believe in, and then get them where they want to be and do it in an accessible way.”
“If you go through the kind of spectrum or timeline, it was stockbroker and then it was financial advisor and it was investment consultant and I guess now we'll say life advisor, right?” added Jeremy Eisenstein, co-head of RIA custody sales at Goldman Sachs. “Truly holistic wealth management.”
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