Offering a sneak peek at PwC’s second quarter 2019 report highlighting asset and wealth management merger and acquisition (M&A) activity, Greg Peterson, financial services leader for PwC deals, and Gregory McGahan, asset and wealth management leader, say there is little sign that the pace of M&A activity will slow down any time soon.
The pair note that wealth management-focused deals rose 58% during the first half of 2019 compared with the first half of 2018. Looking across the whole financial services landscape, the wealth management segment remained the strongest sub-sector for M&A activity, with 29 reported deals—the highest quarterly total during the past five years.
As previously reported, the quarter saw repeat acquirers growing their scale through such transactions, usually focusing on smaller, family office firms. Among the 57 deals announced by wealth management firms from January through June, 46% involved an acquiring firm that had bought at least one other wealth manager since the start of 2019.
“The volume of deals continues to be quite strong, and there is a consistent theme in terms of what is driving this trend,” Peterson says. “The pressure for M&A is coming from a serious crunch with respect to fee pressures and performance pressures. Firms are trying to figure out how to right-size their businesses for the emerging lower-margin environment.”
According to Peterson and McGahan, firms are addressing this challenge by looking at opportunities for outsourcing as well as opportunities to drive overall cost reductions. Many firms are looking to add more volume from a scale perspective, as well, and many of them are looking into the M&A market as a result.
“We still have an environment where it’s pretty cheap to fund these transactions,” McGahan says. “On the sellers’ side, today’s very high valuations are driving more people to sell—not to mention the fact that there are a lot of aging advisers out there who are seeing this environment as an opportunity to transition out of the business. The firms that are making acquisitions are seeking geographic expansions and a deeper customer base.”
According to the pair, high multiples are being paid for a few reasons, starting with the fact that a lot of deals today are taking place in a transparent and competitive marketplace. Back in the early 1990s, they explained, M&A activity in this space was more opaque and tended to come in one-off transactions that did not involve a competitive bidding process. Today, firms are basically being auctioned off to the highest bidder, which essentially creates a premium on the price of these practices.
“One important note is that most of the high multiples reported are based on the historical cost structure of the acquisition target,” Peterson says. “If you are a consolidator here and you’re able to pick up and onboard the new client base while eliminating a significant amount of the fixed and variable costs of serving these clients, just through that shift alone, it makes the multiple seem more reasonable. If you have a strategy that can actually create revenue lift as well, that provides additional upside. A lot of dealmakers are looking at the multiples with this type of thinking in mind.”
Looking out five or 10 years, Peterson and McGahan agree, it is hard to predict where the advisory industry may end up, and whether there will still be clear divisions between institutional-focused RIAs and wealth managers (or other providers such as insurers or asset managers).
“The role of the financial adviser will remain important, we believe,” McGahan emphasizes. “They have faced challenges including the emergence of robo-advisers, but technology in the end can only make their job better. More and more, technology is driving the back office, which allows advisers to focus on the real job of advising—sitting down with clients and working with them in an interpersonal way.”
Peterson predicts that there are going to be fewer advisory firms 10 years down the road.
“There will be large firms that can do a number of different things and work across an entire continuum of services,” he says. “People will go to these firms and get a lot of electronic interaction, but there will still be a person there to help them think through their options and make a choice. Simply put, the marketplace won’t need as many firms to do this work as there are in existence today.”