Deals & People January 25, 2023

RIA Merger Market Hits 9th Year of Record Activity

The M&A tear did finally slow in Q4 2022, marking the first year-over-year quarterly decline in more than four years, according to DeVoe.

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Mergers and acquisitions in the registered investment adviser space had another banner year in 2022, according to consultancy DeVoe & Company, but a slowdown in the fourth quarterhas advisers on the fence about whether 2023 can continue the streak.

DeVoe reported 264 RIA transactions in 2022, a 10% increase from 2021 and a total that smashes the 36 deals from the firm’s first report in 2013. The completed M&A deals took into account the turbulence of 2022, according to the firm: Dealmakers went for smaller acquisitions, gave smaller up-front cash payments and structured cash and equity terms to capture growth upon a market rebound.

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“M&A activity has been surprisingly resilient through a challenging 2022,” David DeVoe, founder and CEO of DeVoe, said in the report released Wednesday. “But the amalgamation of pressure points ultimately fatigued many sellers, particularly ‘do it yourselfers’ who didn’t hire an investment bank. Something had to ‘give,’ and it was often their transition planning initiative.”

That “give” came from the first year-over-year quarterly decline in more than four years, according to DeVoe’s tracking. Transactions in Q4 2022 totaled 61, down 20% from the same quarter in 2021, with October the slowest month of 2022.

RIA opinions are somewhat mixed on whether the slowdown will bleed into 2023, according to DeVoe’s surveying. Forty-two percent of RIA owners and senior executives expect at least a slight increase in activity, nearly one-fourth expect M&A activity to decline in 2023, one-third expect little change.

The near-decade-long run of M&A activity among RIAs has been driven on the one hand by an aging industry looking either to sell to larger advisories, pass the baton to successors or shut their doors. With that movement has come an increase in consolidator firms seeking to boost both talent and assets under management, as well as aggregators bundling insurance, wealth planning, retirement solutions and benefits in the name of providing holistic services to employers.

Short-Term Pain

DeVoe attributed the Q4 2022 M&A slowdown to a “confluence of several factors, including rising interest rates, volatile or declining equity markets, sluggish economies, as well as buyers and sellers being more cautious.”

According to the firm, “buyers were more selective with the opportunities they pursued. Meanwhile, some sellers paused due to valuation concerns.”

Consolidator firms accounted for the biggest shares of transactions at 133, or 50% of all M&A, as tracked by DeVoe. The biggest players were Mercer Advisors (19), Wealth Enhancement Group (13) and Creative Planning (12). RIA firms were the second biggest acquirers, though generally for smaller transactions.

Private equity firms continued their interest in the space, making the most transactions among DeVoe’s “other” category. Insurance aggregators such as CAPTRUST (6) and OneDigital Investment Advisors (6) also showed up among the most active in the report.

Long-Term Gain

While a slowdown may continue in 2023, the long-term trend of RIA consolidation should continue, according to DeVoe.

“In our view, over the mid- and long-term, RIA M&A activity is likely to continue its upward arc,” the report said. “With the average age of RIA owners in their early 60s, a retirement wave is a pressure point that will methodically push more owners toward a transition. If internal succession is not planned well in advance, an external sale becomes the viable alternative.”

The Financial Regulatory Authority issued guidance on succession planning in November, 2022, in part to protect consumers from a surprising break or disruption in their wealth and financial services. But the decision to sell may be harder in 2023, with 60% of RIA owners and executives anticipating lower valuations for firms.

“As always, our advice to sellers (and buyers) is to not try to time the market,” the DeVoe report said. “Business and life decisions should take precedence over one’s hopes or the expectation that a better valuation is just a short time away.”

In Practice January 24, 2023

Savers Want Better Financial Management. How Can Advisers Reach Them?

New research shows an opening for advisers to offer wealth management solutions to savers. An expert in adviser communications says it’s important to know the business, and people, that you want to be your clients.

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A lack of interest is no longer a good excuse. Despite the rise of robo-advisers, app-based individual retirement accounts, and highly successful “set-it-and-forget it” target-date fund plan investment options, many savers are looking for a good financial adviser, recent research shows.

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Nearly two-thirds of Millennial and Gen Z investors (born between 1981 and 2012) see working with a financial adviser as key to their financial success, according to  released research Tuesday by Fidelity Institutional, the brokerage, custody, and adviser solutions arm of Fidelity Investments. Meanwhile, a recent survey from investment researcher YCharts found that a quarter of people already working with an adviser have considered switching since the onset of the pandemic, with 22% making the jump.

Both research reports connect to the businesses releasing them. Boston-based Fidelity announced a new set of tools for advisers to reach younger savers along with its findings. YCharts, based in Chicago, deals in research, presentation tools, and guides for advisers, asset managers, and investors. But the need for human connection from plan participants and everyday savers is real, says Ryan Sullivan, a vice president and managing director of applied insights at Hartford Funds.

“The big challenge these days today is getting people’s attention,” Sullivan says. “How do you get people’s attention for retirement savings? How do you intrigue people enough to have a conversation about how it can benefit them, and for advisers to get them to give more thought to their financial health?”

Sullivan, makes his business working with registered investment advisers and defined contribution investment option providers, says the plethora of new financial tools for participants often doesn’t address their basic fear of running out of money.

“There is this constant news barrage of things to worry about, from market volatility to inflation to world conflict,” Sullivan says. “The more advisers can help people understand this and give them a little more perspective helps them not be afraid to take that next step in planning.”

Know Your Client

Adviser communications professional Sullivan says it’s crucial for advisers to move beyond general discussions about the importance of retirement saving and tools. Instead, an adviser should start with getting to know the client, whether an individual or a business.

“Every adviser wants to be a student of the markets,” Sullivan says. “They need also to be a student of the business they’re working with. If your large plan is a construction company, learn more about the industry, the opportunities and challenges they are facing … they need to go over and above the notion that I want to have this plan and I’m hoping to manage this company’s assets.”

He noted missteps such as an adviser calling a client a “small business,” when in the client’s minds it is not small at all. He also uses the example of an adviser who went out and volunteered with a company during their volunteer day.

“For your bigger clients, this is a different way to show that you literally showed up to something that’s important to them that doesn’t make you a dime,” he says.

According to the YCharts survey, that client communication is not just a nice to have, but a business differentiator. More than one-third of 671 respondents surveyed in December 2022 said they are contacted infrequently by their clients, while more than 88% said they consider their adviser’s frequency and style of communication when deciding to retain their services.

“To create accountability for increasing touch points, define a cadence for client outreach that improves upon current efforts, but is also achievable,” YCharts wrote.

The firm noted tactics such as writing a bi-weekly blog post, emailing a monthly newsletter, or calling each of your high net-worth clients once a quarter. The survey showed that 73% of surveyed clients prefer email communications from their adviser, while 45% indicated a preference for phone calls and 35% like text messages.

Young Investors, Big Plans

Fidelity’s report found 63% of investors born between 1981 and 2012 believe working with an adviser is key to achieving financial success, and 60% feel a heightened need to engage a financial adviser this year due to economic uncertainty. The firm also noted that 57% of existing client assets are expected to be passed to the next generation by 2045 through inheritance. That shift “presents a significant growth opportunity for financial advisors – and potential looming business vulnerability for those who do not prioritize engaging with this group.”

The firm’s new toolkit for advisers includes a young investor readiness assessment that gauges how well a firm is meeting young investor needs, including creating a sustainable approach, new technologies and digital presence, diverse talent and culture, modern product offerings, and evolving client engagement models. It also includes access to a network of service providers offering financial literacy tools and applications.

Hartford’s Sullivan says the underpinning of all adviser communication should be authenticity, not just pitching the “latest and greatest” strategies.

“I think that clients can get a sense when it’s not well-intentioned,” he says. “Instead of advisers trying to be all things to all people, they should give thought to the people that they would like to spend time with … that’s where you can find a true affinity for working with someone.”

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