Data & Research January 24, 2019

Best Practices for Financial Literacy Programs Among Local Governments

The Center for State & Local Government Excellence notes that with many local governments shifting benefits decisions to workers, those workers need help understanding finance basics.

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Pointing out that local governments have changed their retirement benefits since the Great Recession, and that these changes require more decision-making by employees, the Center for State & Local Government Excellence has issued a new practitioner-oriented report, “Financial Literacy Programs for Local Government Employees.”

The Center says financial literacy programs are critically important, as 61% of Americans cannot answer more than three of five questions correctly in a financial literacy quiz. Furthermore, 54% of Americans don’t have enough money set aside to cover three months of unexpected expenses, and 16% spend more than 20 hours a month worrying about personal financial issues while at work. Financial literacy programs can combat these problems, the Center says, resulting in more productive and engaged workers, improved morale, lower absenteeism, lower stress and lower health care costs.

However, only 26% of human resource directors report that their local government offers a financial literacy program and a mere 13% say their local government is planning one. Asked why they do not offer a financial literacy program, 45% said it is because leadership has not identified it as a priority, 30% say it is due to a lack of internal resources, and another 30% say it is because of a lack of financial resources.

Among those that offer a financial literacy program, 95% say it is the human resources staff that championed the program. Only 23% said it is because leadership was the champion, and a mere 15% said it was driven by employees.

Asked what their financial literacy program covers, more than three-quarters say it is planning for retirement and budgeting. More than half address debt and investments, and less than 20% cover banking and payment methods, long-term care and elder care, and non-bank borrowing.

As some local government workers have limited formal education, the Center notes, it is no surprise, then, that 64% of programs use plain language instead of technical terms. Only 3% use mobile technology, text messages and social media.

Ninety-one percent of financial literacy programs are offered to the entire workforce, and one-third also make them available to non-employees, such as spouses and dependents.

Asked what benefits they witness from financial literacy programs, 51% say workers increase their contributions to supplemental savings plans, 43% say workers become more engaged with compensation issues, and 41% say cost savings for the jurisdiction that at least partially offsets the expense of offering the program.

Best practices for practitioners

The Center recommends that local governments first conduct a formal, or informal, needs assessment to find out what topics their workers would like to be covered in a financial literacy program, as well as how they would like it to be delivered. The Center also suggests that financial literacy programs for local governments use easy-to-understand language and offer the materials in multiple languages.

The Center advocates for offering financial literacy programs to non-employees, and that financial literacy programs be made available on mobile devices, as well as through text messages and social media.

To get the buy-in of leadership, practitioners need to tell leaders how financial literacy programs improve productivity, reduce health care costs and improve morale and retention. Certainly, the Center says, it is important to evaluate the impact of the program, to communicate the impact to leadership and to use the information to continuously improve the program.

The Center notes that since the Great Recession, many local governments have not been able to fund wage increases and are shifting more benefit costs to workers. As such, it is important to educate workers on financial concepts, terms and considerations, the Center says. For retirement benefits, because local governments are reducing pension benefits, employees need to increase their contributions to 457 or 401(k) plans. Additionally, because some local governments are moving to high-deductible health care plans, workers need to be educated about health savings accounts (HSAs).

“As more benefit costs and management responsibilities are transferred to local government employees, their ability to understand and make financial decisions for themselves will increasingly be linked to their long-term financial security,” the report says. “It is essential for local governments to provide the educational tools necessary to best position their employees to make informed financial decisions.”

Topics such programs should cover, according to the Center, include planning for retirement, spending versus saving, creating a rainy day fund, planning for college, basics on buying a home, paying off debt and loans and non-bank borrowing.

The “Financial Literacy Programs for Local Government Employees” report can be downloaded here.

In Practice January 24, 2019

Advisers Can Benefit From Asset Manager M&A Trends

One key M&A trend identified in a new PwC report is the growing prevalence of large asset management and/or private equity entities making minority-stake investments in wealth management firms.

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PwC today released its quarterly Deals Insights report, offering a detailed analysis of merger and acquisition (M&A) activity within the asset and wealth management industries during the final three months of 2018; the report also looks forward to anticipated trends in 2019.

“Financial services deals are continuing across all sectors at values we haven’t seen for years,” said Greg Peterson, partner and U.S. financial services deals leader, while previewing the report for PLANADVISER. “M&A opportunities are ripe among regional banks, FinTech, asset and wealth management, payments businesses, and all types of insurance firms.”

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According to PwC’s analysis, the value of deals across financial services sectors during 2018 “shot above” prior year levels. The surge shows no signs of weakening in 2019, Peterson said, thanks to digital disruption, market volatility, and the clear gains from consolidation. Even in the case that the economy slows or even enters a recession in the next year, Peterson suggested M&A activity will most likely continue at a strong pace, given the driving business fundamentals that are at play.

“We expect corporate, venture, and private equity to play a bigger role in acquisitions and minority investments both inside and outside the U.S.,” he noted.

Within the asset and wealth management domain, PwC finds this sector recorded its strongest M&A quarter of the year during the last three months of 2018. Fourth quarter deal volume rose to 54, with total announced deal value at $9.4 billion. The surge in activity helped make 2018 the strongest year since 2015, the report shows, with 140 announced deals and total disclosed deal value reaching $14.9 billion, compared with $8.6 billion in 2017.

For context, Fidelity’s recently published Wealth Management M&A Transaction Report shows there were 23 deals inked during 2018 specifically within the registered investment adviser (RIA) space worth $1 billion or more. According to Fidelity’s report, the 2018 RIA transaction number was down compared with the 2017 figure—though assets in motion were up significantly. In total, Fidelity says there were 95 transactions totaling $563.4 billion in 2018. Assets transacted more than doubled, up from 2017’s $265.5 billion, across RIA and independent broker/dealer (IBD) channels.

PwC’s report also highlights M&A activity in the insurance brokerage sector. The fourth quarter saw 151 announced deals in the insurance sector, with a total disclosed deal value of $2.2 billion. This increased total disclosed deal value for 2018 to $40.3 billion, or more than double the $19.5 disclosed deal value in 2017. Nine deals exceeded $1 billion in 2018, compared with seven such deals during the prior year, according to PwC.

Looking specifically at asset managers, PwC finds deal activity in the traditional asset management space rose during 2018. Several forces impacted these transactions, said Gregory McGahan, partner and U.S. alliances and joint ventures practice leader. These include fee pressures from low-cost passive managers, the challenge most active managers face in beating benchmarks, and significant pressure on margins and AUM share.

The PwC report highlights the largest asset manager transaction in 2018—Invesco’s acquisition of OppenheimerFunds from MassMutual in a $5.7 billion stock deal. Important to note, PwC says, MassMutual did not exit the space. Instead, it is now the largest shareholder in a firm managing more than $1 trillion.

An Industry Still Ripe for Disruption 

Reflecting on their latest research findings, the PwC partners said the asset management and wealth management industries have long been considered ripe for evolution and consolidation. This is clearly one reason why M&A in the sector was strong in 2018, with record deal value and a sizable number of transactions exceeding $1 billion.

“We believe there is much more activity to come and more deals to be consummated given both the fundamentals and challenges across the sector,” McGahan said. “In a volatile and uncertain environment, asset managers with the ability to use stock for transactions would be best suited to execute large transformative deals.”

The PwC partners noted that asset manager consolidation could begin to cut back on the ever-expanding number of mutual funds and exchange-traded funds (ETF) made available to individual and institutional investors. The report says industry experts estimate the current U.S. mutual fund and ETF count to be in excess of 10,000. McGahan and Peterson raised the question of whether there is room for so many managers and overlapping products, implying consolidation may be inevitable even before one considers the serious fee and margin pressures facing providers.

The report points out that both active and passive managers face serious fee pressure. According to PwC research, actively managed mutual fund fees are expected to drop by approximately 19%, from an average of 54 bps in 2017 to 44 bps in 2025. As in the past, passively managed funds will face the biggest decline, PwC predicts, with management fees projected to decline 20.7% by 2025.

“Price will probably be the key differentiator amid intense competition for market dominance,” the report concludes. “Fee pressure is expected to persist until asset managers improve their performance. Investors are increasingly looking to derive greater value from fees, and there is more consideration these days by traditional asset managers to switch to outcome-based fee structures.”

Opportunities for Advisers? 

According to the PwC partners, there are two other important takeaways from the new report for retirement plan advisers. First is a “blurring of the lines” between firms considered to be asset managers versus insurers. The pair noted how the insurance company sector is pursuing more acquisitions of complementary businesses that formerly would be considered to be part of the wealth management or asset management sectors.

“There are insurance firms and alternative managers that are looking for opportunities to generate excess value for clients while also expanding their reach,” McGahan said. “We have seen firms going out and buying blocks of advisers to add to the equation. Of course, their challenge is going to be retaining these advisers over time.”

The second takeaway is the growing importance of minority stakes being taken in asset management and wealth management businesses—for example when a private equity firm or larger, established provider makes a minority investment in a smaller, independent wealth management firm.

“We are seeing a lot of these large funds come in and make minority investments in small shops,” Peterson noted. “For the firms receiving such investments, they gain a new source of capital and a real succession planning opportunity while also remaining independent. We see mutual benefits to both sides of the equation with this strategy, which is why a lot of big names are getting involved in this space. We don’t think we will see a reduction in this type of deal anytime soon.”

Another M&A expert who spoke recently about these trends with PLANADVISER is Dick Darian, CEO of Wise Rhino, a firm created specifically to help facilitate wealth management industry M&A activity.

For advisers considering getting involved in all the M&A activity, Darian recommended forcing oneself to put the rationale of any potential transaction into writing. The written plan must answer two key questions: Why is the firm unable to solve an issue on its own? And why does the firm believe others might be able to it do this? It is best to do this work well in advance of any planned M&A activity.

“I started my business because advisers do not know how to answer these questions,” Darian said. “One way to explain this is that the typical advisory firm owner focuses so much more on the practice than on the business. Very few firms formalize their thinking about the practice as a business that could be valued, bought or sold. In my experience, I don’t think many advisers can honestly assess their strengths and weaknesses and compare this with what is available out there in terms of buying or selling capabilities. It’s very complex and very emotional work to do. Many people are not prepared even to understand where they stand today, let alone where they should go.”

If an adviser wants to start to define what a practice might be worth, the revenue and expense numbers obviously matter as a jumping off point. How big is the business, and is it growing, staying the same or shrinking? Important to note, the vast majority of acquirers active in the wealth management space today are not just looking to buy a book of business and send the adviser packing. They want the adviser to come in and continue building the business through existing relationships.

Another important point is that any final valuation is not just about the multiple, Darian said. The multiple in any deal will vary based on size of the firm and based on the character of the business itself.

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