Data & Research July 24, 2023

Schwab: Financial Advisers Using Behavioral Finance Gain More in New Assets

Advisers also turned to personalized options such as direct indexing to stand out for clients. 

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Registered investment advisers who leverage behavioral finance tactics when working with clients saw more new assets from existing clients in 2022 than those who did not incorporate the method, according to Charles Schwab Corp.’s 2023 RIA Benchmarking Study.

In data drawn from 1,300 adviser firms, the financial services company found that advisers implementing behavioral finance—the psychological factors that go into investment decisions—saw 3.3 times more new assets from existing clients. About half of the firms surveyed responded that they use behavioral finance in their practice and implement it with more than half of their client base.

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“Behavioral finance can help advisors deliver more impactful client experiences by increasing client satisfaction,” the Schwab report stated.

Schwab Asset Management offers advisers use of behavioral finance techniques through a program called Biagnostics, Greg Laurence, head of RIA distribution, said via email. The program, developed by Schwab Asset Management CEO and CIO Omar Aguilar, has been available for five years. 

“Client communications and portfolio construction are two of the key avenues for advisers to implement behavioral finance into their practices,” Laurence said. “Proactively reaching out to clients when markets become volatile to remind them of their long-term goals is an example of incorporating behavioral finance into client communications.”

Amid the market volatility of 2022, financial advisers also turned to personalizing investment options for clients, according to Schwab. RIAs looked to differentiate themselves by offering options such as direct indexing, in which indexes are designed for the investor with customized options; value-based investing; and the use of separately managed accounts.

“As more investors choose RIAs, firms can manage growth by using scalable processes to create capacity for personalization strategies,” Lisa Salvi, managing director of business consulting and education for Charles Schwab Advisor Services, said in a statement. “Personalization allows advisors to differentiate their offerings—in how they interact with clients, the services they provide, and their investment approach. Deepening the relationship in this way will help create enduring enterprises and lasting success.”

Advisers saw either a decline or flat rate of growth for assets under management due to 2022’s market volatility, according to Schwab. But year-over-year organic growth was stronger, coming in at a 6.2% increase for firms with less than $250 million AUM, 4.1% for firms with more than $250 million in AUM and 10.8% for those that rank in the top 20% of Schwab’s analysis of firm performance.

“Organic growth was a bright spot in 2022 as firms’ value propositions continued to attract investors,” the report stated.

The annual benchmarking report also found that RIAs are leaning on digital tools and workflows to maximize client services. The top-performing firms reported 20% less time per client spent on operations and administration (13 hours) and 10% more time per client spent on client service (31 hours), as compared with the rest of the respondent pool.

That need for technology unavailable to smaller, independent advisories could be part of the continued drive for RIA mergers that provide scale and access to resources. According to Schwab’s study, half of all firms are looking to acquire another RIA.

Meanwhile, recruiting talent in a tight labor market continues to be a key focus for RIAs, ranking as the No. 2 strategic priority behind acquiring new clients through referrals. Of firms that responded, 77% reported hiring in 2022, and 75% plan to hire in 2023. Meanwhile, this year’s data included the highest percent (37%) of firms recruiting from colleges and universities since Schwab began the study.

“Firms continue to prioritize attracting new talent as well as developing their existing teams to ensure they deliver the services and experiences through the lens of their ideal client,” Salvi said.

Correction: Headline corrected to note advisers using behavioral finance tactics gain more new assets than peers who do not.

Deals & People July 24, 2023

DeVoe Predicts First Down Year for RIA M&A in Almost a Decade

High interest rates, inflation and uncertainty are depressing RIA dealmaking.

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The dealmaking boom in the registered investment advisory industry may finally have peaked, according to analysis released Monday by consultancy DeVoe & Co..

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High interest rates, persistent inflation and market uncertainty are the key factors depressing dealmaking, according to DeVoe’s M&A report for the second quarter. While the market remains active, 2023 could be the first year to show a decline in deals after nine consecutive annual increases.

“Given the slow start of M&A activity for the year and expected persistence of the macroeconomic conditions, it is unlikely that 2023 will be another blockbuster year,” the firm wrote. “The first annual M&A decline in nearly a decade may be upon us.”

RIA deals have been one of the drivers of the convergence of retirement plan advisement and wealth management in recent years. Retirement and wealth aggregators such as CAPTRUST Financial Advisors, SageView Advisory Group LLC, OneDigital and Hub International Ltd. have all made DeVoe’s reports in recent years for dealmaking. But the deal-pipeline may be slowing, for now.

In the year’s second quarter, DeVoe reported 57 transactions, a 15% decline from the 67 completed in the same period in 2022. M&A is down 10% overall for the first half of the year with 120 total transactions, according to the consultancy.

“Both buyers and sellers are a bit more timid in the current market,” DeVoe wrote. “The macroeconomic conditions of high inflation, continued high interest rates and long-standing uncertainty in the economy and financial markets are likely weighing on the industry’s M&A activity.”

The Federal Reserve has been raising interest steadily since March 2022 to combat rising inflation and has indicated further raises may happen this year. The stock markets have been rebounding in 2023, with the S&P 500 up more than 19% since January.

More Selective

Part of DeVoe’s prediction of a down year comes from CEO and senior executive surveying. According to the firm, in its most recent polling there has been a jump in business leaders saying their deal pipelines were smaller than they were four to six months ago—clocking in at 33% of executives, as compared to just 7% in December.

Meanwhile, firms appear to be growing more selective in acquiring RIAs. In DeVoe’s surveying, 40% of respondents said they are being more selective in their approach to considering firms, compared with 27% in December 2022.

“Buyers are continuing to refine their optimal target—which is good for everyone, as it saves all parties time and will contribute to stronger, more aligned organizations,” DeVoe wrote.

When it comes to acquirers, RIA firms themselves have taken on more of a role than in the past, according to DeVoe. RIA buyers executed about 30% of the deals in the first six months, up from 23% in the same period last year.

Consolidator firms who acquire across different areas in search of growth are showing small declines in transactions in part due to “the interest rate environment” affecting their capital and economic positions, DeVoe wrote. Meanwhile, some are spending more time on due diligence, meaning transactions are taking longer to complete, all leading to a 17% drop in transactions for consolidators in Q2 to 29, down from 35 in the same period last year.

In the final category of “other,” which includes private equity, insurance and benefit companies, and broker/dealers, DeVoe continued to see PE as driving dealmaking. In the first half of 2023, private equity firms executed nine transactions, or 33% of transactions in the category. The firm pointed to a notable new entrant into the RIA space, Altas Partners, which invested in Mercer Advisors in June.

Smaller Packages

DeVoe also noted that, in the last 18 months, smaller RIAs in the $100 million to $500 million range have accounted for about half of the deal volume, part of an ongoing trend toward smaller purchases.

“These smaller RIAs are likely to feel the greatest competitive pressure in the evolving marketplace and typically are selling to gain the benefits of scale,” the consultancy wrote. “At the same time, interest in this segment from acquirers has increased, as smaller firms typically sell at lower multiples.”

Despite the potential for decline in 2023, DeVoe continued to forecast a strong M&A market in the “near future.” Nearly all of the major acquirers surveyed by DeVoe are optimistic they will maintain (40%) or increase (53%) their historical number of transactions in the next six months.

“As today’s RIA M&A dynamics are mainly being affected by the macroeconomic environment, DeVoe & Company expects that as the U.S. economy and stock market recover, and when interest rates decline, M&A will resume its upward climb,” the firm wrote. “Buyers have been and are able to digest acquisitions more effectively and have appropriately become more selective. Sellers can be more strategic in their decisions, as a degree of frenzy has subsided.”

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