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ANALYSIS: Capital, Demographics Driving Wealth Management M&A

Tom Burroughes, Group Editor , October 1, 2018

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This news service talks to North American wealth managers about why they think there's so much M&A going on in the sector.

Barely a day goes by now without a report of a wealth management firm purchasing another. 

Practitioners see this as part of a much-predicted consolidation trend in the sector, driven by rising costs – some caused by regulations – and a desire for larger brands, and aided by a trend of older advisors selling up to retire. Whatever the causes, M&A in North America’s private client wealth sector has been busy. 

To give a few recent cases, last week San Rafael, Marin County-based wealth management firm Private Ocean bought Mosaic Financial Partners, a San Francisco-based registered investment advisory firm. Mosaic has $620 million in assets under management as of the end of August. Another transaction saw iCapital Network, a financial technology investments platform, stating that it was buying Bank of America’s alternative investment feeder fund operations businesses, which represents about $20 billion in client assets. The US wealth management house CAPTRUST Financial Advisors bought a North Carolina-based wealth firm with about $400 million in AuM, its thirtieth deal since 2006, taking total AuA to $278 billion. One of the more eye-catching deals saw UBS shut the UK robo-advisory service, UBS SmartWealth, which was launched in 2016, and sell the technology to US digital wealth manager SigFig.

“We’re seeing an elevated level of interest in M&A by principals of quality wealth management firms. This is most likely because they believe we may be near or at a business/market cycle peak, which tends to correspond with peak values of wealth management firms,” Kurt Miscinski, president of HPM Partners, a wealth management firm, told Family Wealth Report

Amit Dogra, CEO of Third Seven Advisors, a New York-based RIA, said demography and availability of capital is pushing the M&A carousel: “Capital is the driver of M&A at the moment. An aging advisor population is also a major contributor. As valuations remain high and buyers continue to enter this space, M&A activity will continue for the foreseeable future.”

Some organizations such as Focus Financial or Raymond James aggregate teams and firms, sometimes allowing groups to keep their original brand identities. Recently, this publication spoke to Dynasty Financial Partners, a business that has developed a network of wealth firms and provides financing and other services. It expects larger RIA businesses to become more common as economies of scale affect the sector.

ECHELON, a US investment firm that advises wealth managers on M&A deals, said that the first quarter of this year saw a total of 46 transactions, and the company predicts that the US market will clock up more than 185 deals in 2018. One trend within the wider M&A agenda is a rising number of wealth management deals where assets under management are over the $1.0 billion watermark. ECHELON said recently that such transactions are slated to surpass the five-year average of 20 transactions by about 30 per cent this year.

RIA mergers trend

A sign of busy activity is that there are now quite a cluster of firms advising wealth managers about buying and selling companies. Examples include ECHELON, DeVoe & Company, and in Europe for example, MilleniumAssociates. 

An expected $30 trillion shift of wealth from the aging Baby Boomer generation - creating a big demand for advice - and the sense that wealth management is a more lucrative business to be in than some more capital-intensive financial sectors, has made firms in the space an attractive target.

“We suspect there is so much M&A activity for three reasons: First, we’re likely at or near a business/market cycle peak after one of the longest expansionary periods in history. Second, wealth management has become the preferred sector within financial services due to favorable demographics (the high net worth market is currently experiencing faster growth than retail), the predictability and stability of wealth management firms’ cash flows and the acceptance and growth of new aggregator business models,” HPM Partners’ Miscinski said.

“Lastly, the principals of many firms are seeking to monetize some or all of their equity and create better growth opportunities for their colleagues. We anticipate that the pace of M&A activity will likely slow upon the next business/market cycle contraction,” he said. 

“We continue to observe a trend away from financial products toward holistic wealth management - a business model and client-centric value proposition that requires meaningful investment in people, technology and marketing to achieve reasonable growth. We believe principals of wealth management firms who are exploring a merger with a larger firm are seeking a combination of attractive growth opportunities for their younger colleagues and, possibly, liquidity for some or all of their equity,” Miscinski continued. 

The consolidation trend is by no means set in stone, however. Third Seven Advisors’ Dogra noted the arrival of newbie players – a situation preventing the sector from being dominated by monoliths.

“The idea of large firms dominating is not unique to the advisory market; this type of thinking has been around for a long time. While there may come a time where there are large players in the advisory market, we can look at other industries like accounting or consumer banking to see that mid-size and small-size firms will always have a market with clients,” he said.

Recent launches include Dakota Wealth, EPIQ Capital Group and Sanctuary Wealth Partners. There is still plenty of start-up vigor around.

Tech not to blame
With all the buzz around financial technology, it might be assumed that this was causing consolidation, but Miscinski is not convinced. 

“Advancement in technology has and will continue to improve operational efficiencies, the client experience and data aggregation. We find that many of these advancements are affordable and readily accessible to wealth management firms of all sizes. As such, we don’t believe modern technology is driving M&A activity,” he said. 

Dogra also does not see fintech as, yet, being quite the force it is made out to be. 

“We are in the early stage of robos and other technology. The influence of these technologies may increase at some point in the future, but today it is more of a headline grabber than an actual disrupter,” he said. 

Paul Gamble, CEO of 55ip, an investment strategy engine working with wealth managers, is rather more fulsome about the impact of technology on the industry, including the M&A side: “Advisors are being asked to do more to add value for clients while struggling to remain profitable and grow revenue. Many platforms have come to market aimed at improving and scaling operational processes.”

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