Connectivity
According to Joe DeNoyior, national president of Hub Retirement and Private Wealth, in Chicago, the pace of merger and acquisition deals between retirement plan specialist firms and wealth management firms will intensify.
“We’re in the early stages, particularly of wealth-centric and retirement-centric firms coming together. It’s been happening slowly, and I think it’s going to pick up for the next few years,” says DeNoyior, who adds that Hub is actively looking for wealth management practice acquisitions that make strategic sense. “Many retirement plan-centric firms are focusing more on bringing in wealth management advisers. And many wealth management advisers are opening up more to joining a bigger firm to enhance their services.”
The Deal Drivers
The acquisition trend runs two ways, says Brandon Kawal, a principal in Advisor Growth Strategies, a Phoenix firm that consults with advisers on M&A and other strategic issues. “We’re seeing it pick up on both sides: retirement plan advisory firms acquiring wealth management firms and wealth management firms acquiring retirement plan advisory firms,” he says. “In the marketplace, there’s a trend toward one-stop shopping that we’re starting to see take hold.”
The trend of mergers and acquisitions involving retirement planning and wealth management firms “has been heating up over the past few years and appears to be only strengthening,” says Daniel Seivert, CEO and managing partner at Echelon Partners, a boutique investment bank focused on M&A and succession planning for the wealth and investment management industries, in Manhattan Beach, California. Asked why a wealth management firm might want to be acquired by a retirement plan specialist or vice versa, he says, “First and foremost is the opportunity for cross-selling and the multitude of ‘warm’ relationships that retirement planning firms can offer to wealth managers.”
The desire for growth drives both buyers and sellers in these deals, Kawal says. “There’s the intrigue of the idea of creating growth channels from the retirement plan business that eventually convert into wealth management business in the long haul,” he says. “There’s more cross-pollination happening and an intriguing opportunity for wealth managers to say, ‘This is another growth channel for us, to be part of this larger ecosystem.’”
“There’s more cross-pollination happening and an intriguing opportunity for wealth managers to say, ‘This is another growth channel for us, to be part of this larger ecosystem.’ ”
The combination of a wealth manager and a retirement planning firm creates a more comprehensive financial service provider, Seivert says. “Bringing together businesses via M&A and strategic partnership, which allow for more holistic servicing of clients’ ‘financial wellness,’ has been a huge emphasis within the financial services industry of late,” he says. “And these types of combinations are prime examples of that thesis in play.”
Retirement plan services and wealth management services are no longer seen as the silos they once were by some. “The two have started to converge very closely,” DeNoyior says. “Employers more and more realize that their employees are counting on them for help with their total well-being. As advisers, we always ask, ‘Can we help employers to become an employer of choice?’ Part of that is access to help with employees’ well-being, and part of well-being is their overall financial security.”
Kawal says the recent influx of institutional capital, such as private equity firms looking to invest in these businesses, plays a significant role in the removal of the silos. “With much institutional capital coming in—and trying to figure out a differentiated strategy—that is influencing the drive to add services to offer. There is becoming a competitive pressure to offer more services and to capture a greater ‘share of wallet,’” he says. “The competitive bar is rising, and advisory firms are saying, ‘We have to keep up, and now we can offer a broader tool kit to our clients.’”
For the advisers being acquired, DeNoyior says, it boils down to whether it is the right long-term strategic move. “A firm with a ‘For sale’ sign up is generally not the most attractive acquisition,” he says. “Most of the acquisitions Hub makes start with advisers just exploring it, to see if a deal might make sense. Then they realize it’s a better strategic fit for them, their clients and their employees. I think you’re going to see more of this in the next couple of years.”
Many smaller and midsize advisory practices that work with retirement plans also have long had some wealth management clients. “In the retirement plan world, among us retirement nerds, we always thought of retirement plan work and wealth management as being very siloed,” DeNoyior says, observing that a relationship has long existed. “My firm has always been 50-50 between wealth work and retirement plan work,” he says, referring to Washington Financial Group, where he served as CEO prior to its 2019 acquisition by Hub. “In my firm, we saw the need for both from the start, 25 years ago.”
Since many wealth management firms already have some retirement plan advisory clients, it is easier to explain to them why getting purchased by a retirement plan specialist makes sense, Kawal says. “So now they might say[, regarding a potential acquirer], ‘Here is a fully integrated offering. Now we can address the retirement plan side of our clients’ lives better.’”
A Long Runway of Acquisitions
The increase in M&A activity comes amid a trend in private equity firms making minority investments in the wealth management industry’s largest strategic acquirers, Seivert says. These financial investors’ interest is driven by their desire for business models with a high degree of recurring revenue, their attraction to a business with high “friction” costs for clients to switch advisers, and the ability to conduct an M&A strategy that lends itself to ongoing growth as more advisory firms get acquired.
Recent key deals include Warburg Pincus’ purchase of a minority interest in Edelman Financial Engines, a year ago March, and Leonard Green & Partners’ acquisition of a minority stake in Mariner Wealth Advisors the following month.
“Due to the minority investments private equity firms have made in many strategic acquirers in the wealth management industry, 69.7% of 2021 total deals involved either a private equity firm or a strategic acquirer backed by a private equity firm,” Seivert says, citing an Echelon statistic. “Private equity interest in the U.S. wealth management industry is so high that some American private equity firms are turning their attention to wealth managers in the U.K., in search of a less competitive M&A environment.”
As institutional investors such as private equity firms invest more heavily in wealth management firms, consolidation has intensified. “We’re seeing the biggest wealth management firms get bigger, faster,” Kawal says. “The larger firms now disproportionately control wealth management assets compared with smaller firms. The total number of wealth management RIAs [registered investment advisers] is still going up, because the barriers to entry aren’t that high. But because of M&A and larger firms’ organic growth capabilities, the big are getting bigger.”
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