2021 was another record-setting year for the Wealth Management and RIA space. During the past twelve months of unprecedented activity, we’ve had the opportunity to speak at length with decision-makers at many of the most active acquirers and investors in the industry. Through these conversations, a “mosaic” has emerged about the collective thinking and strategic positioning of prominent industry participants. We present the most important takeaways from these conversations below.
A Clear Strategy
In general, the most active firms in the space have a clear strategy and are intentional about M&A. These firms typically have internal corporate development teams and dedicated integration personnel. They understand that a transaction is just the first step of many when it comes to a successful acquisition. Managing the full integration of a new firm is the hardest part, and successfully doing so plays a significant role in helping their firm be seen as a “buyer of choice” for future acquisition candidates. It seems that firms with the longest acquisition history have the most developed integration teams, borne perhaps from the painful lessons of not having these resources during earlier acquisitions.
The Motivations Behind Acquisitions
Motivations for acquisitions vary. Some are mission-based, such as a commitment to expanding the fiduciary model. Others are strategic, such as becoming the premier provider of family office and wealth management services to ultra-high-net-worth families or, conversely, to mass-affluent families. Some acquirers aspire to be one of the “handful of national firms left standing” once the consolidation dust settles. Throughout all our discussions, however, there has been a consistent motivational theme: providing greater services to defend fees.
While there doesn’t seem to be anecdotal evidence of fee pressure, it is often discussed and there is a significant focus on securing a robust “suite” of services to solidify a firm as a comprehensive solution for clients. At the core of this focus is a conviction that strong, value-added relationships alleviate pricing concerns.
What we don’t hear as much from acquirers these days is that they are struggling with organic growth (net new assets). In fact, several say they have more leads than they can handle. Their challenge, instead, is finding enough good advisors to join their firms and help manage their growing client base. Firms with comprehensive service offerings experience high client retention, which helps maximize their Organic (net) Growth Equations. As for sources of this growth, everything from custodian referral networks to increased digital marketing strategy is providing firms with a consistently growing pipeline.
On that note, the fact that this is a growing, highly profitable business model with high client retention rates is often motivation in and of itself. Sustainable 25% to 35% operating margins and 98+% client retention are common. Combining these attributes with solid Organic Growth and generally upward trending markets contributes to high visibility and higher valuation multiples. In short: acquirers can do well by doing good and help themselves while helping others.
For more insights on the motivations behind RIA acquisitions, see our recent piece on the “Why” behind acquiring an RIA.
Less Need for Additional Capabilities
Interestingly, larger firms are generally not looking for additional capabilities. They already have them. While they are attracted to firms that may bring a new “wrinkle” to the equation (i.e. alternative investments for high net-worth families), larger firms are primarily focused on marketing their own comprehensive capabilities (or “their platform”) as a reason for smaller, less-resourced firms to join them.
These smaller firms are the ones that are beginning to struggle with true (net) Organic Growth. For them, the prospect of spending the time and money to develop their own platform and processes can be daunting. While most transactions still involve firms with less than $1 Billion in AUM, the number of transactions above $1 Billion is increasing, driven partly, we believe, by the need to join well-resourced organizations. To the extent a medium-sized acquirer does not yet have a comprehensive wealth management offering, they will be more interested in specific “unique capabilities” such as estate planning, tax, and ESG investing.
The Importance of Culture
The importance of culture came up in many conversations. This was particularly prevalent amongst integrators who are building a single brand with a focus on providing a consistent client and employee experience in every region.
For many firms, this “culture conversation” revolves around questions like:
The importance of culture, combined with a dearth of next-generation talent, reinforces a firm’s need to look at several opportunities before acquiring. Culture certainly mattered to aggregators and minority investors as well, because they want their affiliates to be great partners with good growth potential.
Current Views on Valuation
The significant increase in acquisition multiples has been much discussed, with various comments about where transactions have been valued, either through acquisition or through private equity investment in larger RIAs. As a group, corporate development officers reminisce about when the multiple range for an acquisition was 6x to 10x adjusted EBITDA, with 10x being paid for the largest firms. Today, as we know, that range is much higher as the space attracts more capital. Several players have expressed concern about the use of leverage in these acquisitions and the potential impact of a prolonged bear market.
Separate from the higher multiples being paid is a general sense that adjusted EBITDA forecasts need to be closely scrutinized. Acquirers understand the competitive dynamic in the M&A marketplace, but they want to make sure that the forecast operating profit accurately reflects the normalized, ongoing nature of the business. What is truly recurring vs. non-recurring? What needs to be added back or subtracted? What synergy assumptions are realistic? There have been some instances where acquirers have “missed” opportunities because they based their valuation off a lower EBITDA forecast than was being provided by sellers.
The Importance of Culture
The importance of culture came up in many conversations. This was particularly prevalent amongst integrators who are building a single brand with a focus on providing a consistent client and employee experience in every region.
For many firms, this “culture conversation” revolves around questions like:
The importance of culture, combined with a dearth of next-generation talent, reinforces a firm’s need to look at several opportunities before acquiring. Culture certainly mattered to aggregators and minority investors as well, because they want their affiliates to be great partners with good growth potential.
Current Views on Valuation
The significant increase in acquisition multiples has been much discussed, with various comments about where transactions have been valued, either through acquisition or through private equity investment in larger RIAs. As a group, corporate development officers reminisce about when the multiple range for an acquisition was 6x to 10x adjusted EBITDA, with 10x being paid for the largest firms. Today, as we know, that range is much higher as the space attracts more capital. Several players have expressed concern about the use of leverage in these acquisitions and the potential impact of a prolonged bear market.
Separate from the higher multiples being paid is a general sense that adjusted EBITDA forecasts need to be closely scrutinized. Acquirers understand the competitive dynamic in the M&A marketplace, but they want to make sure that the forecast operating profit accurately reflects the normalized, ongoing nature of the business. What is truly recurring vs. non-recurring? What needs to be added back or subtracted? What synergy assumptions are realistic? There have been some instances where acquirers have “missed” opportunities because they based their valuation off a lower EBITDA forecast than was being provided by sellers.
Regardless, there is a consensus that consolidation will go on for a while and that firms are being competitive. They are working hard to identify new “partners” with proactive outreach to firms in strategically important geographies who fit their ideal candidate profile. It is a crowded marketplace and prospective sellers are reacting to constant inquiry. As mentioned in earlier writings, sellers will benefit from having a strategic reason to support their “Why” behind selling, which will help them be more discerning in navigating an eager M&A market.
Personalized Guidance for RIA Buyers & Sellers
Whether you’re looking to buy or sell an RIA, Harbor View can help. Our Financial Services practice is led by Doug Moffitt, a Wall Street and Wealth & Asset Management Veteran of more than 35 years. Doug has “walked in your shoes” and now uses his deep industry expertise to achieve outcomes that align with your true motivation (or your “Why”). If you are considering a potential strategic alternative for your company – connect with us at Harbor View. Our investment banking services help companies get the results they deserve, guiding them step-by-step through all stages of a transaction.
DISCLAIMER This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.
