To view FA's 2019 RIA ranking, Click here .

To view FA's 2019 RIA 50 fastest growing firms, Click here.

 

Did you hear a tornado alarm in May? That might have been the sound of Goldman Sachs invading your industry.

The investment bank’s purchase of United Capital for $750 million has likely changed the game in a space already giddy with M&A activity. The consolidation in the RIA world is happening at a rapid pace and shows no signs of stopping—it’s happening for a number of reasons, not only financial ones, but amid a backdrop of demographic trends that cut to the heart of the U.S. economy.

As the baby boom generation joins the AARP crowd, the advisory industry does so apace: People are retiring and wanting to turn their assets over—to people who are also retiring. Who is going to get that money? Goldman, a white shoe firm catering to the ultra-wealthy, obviously saw a good thing in United Capital, a firm known for its intense national branding, Jenny Craig-like holistic card systems and access to people at the lower end of the wealth rainbow. “Access” was a key word in Goldman’s press releases heralding the purchase at an estimated 18 times cash flow.

Overheated Market?
Because the market is good, advisors are likely thinking the best deals for their firms are to be found now. The demographic changes are also putting clients in play.

“We have had clients who’ve come from firms where the advisors were the same age as them,” says Jason Ozur of Lido Advisors in Los Angeles. “What they didn’t want was a situation where they were 75 and their advisor was 75 years old.” Because sellers likely have high expectations, he says, buyers have to look at the composition of the portfolios they’re getting. “How did they do in the fourth quarter of last year? The markets were down 14% or 15%, and the portfolio being managed by the company we’re going to acquire is down 12%. Do those clients fit in with the way we manage money?”

Parties always end. The bull market will stop too. 2018 offered another glimpse of somber times after trade disputes and uncertain Fed moves sent cold shivers through the markets. The S&P 500 caught the cold, tumbling 13%-14% in the fourth quarter, and 6.59% for the year (with dividends included, it was a negative 4.75%). “The challenge everybody has in the space when the market’s down is that the revenue is down at the same time the workload is up,” says Scott Hanson, co-founder of Allworth Financial in Sacramento, Calif.

The RIA firms that Financial Advisor spoke with didn’t change any plans or lose much sleep over the December slide, however. The markets came roaring back in the first quarter of this year and plans continued apace. But the foreshadowing of less friendly market conditions can’t be ignored.

In any case, Jeff Maurer, the founder and CEO of high-net-worth wealth manager Evercore Wealth Management, says, “It’s very hard to grow a firm at a double-digit rate based on a bull market. You have to go do it in hand-to-hand combat—finding new clients, having existing clients choose you as their sole advisors. Adding talent with assets. Sitting back and waiting for the market to grow your revenues is a recipe for disaster.”

Hanson (whose firm, the former Hanson McClain, was rechristened Allworth in April) began acquiring for the first time last year after growing organically for years before that. “We’ve had more changes in the last year than in the history of our firm,” he says. Acquiring clients, assets and partners became the new growth strategy, and to that end Allworth acquired four other firms (it also gave up its well-polished West Coast brand name in a nod to new partners).

He says the giddy merger activity is echoing that of the insurance and brokerage giants 10 years ago. He says those companies are now 10 times the size of advisory firms, and believes the same will happen to the RIA space. Bear markets notwithstanding, he sees a lot of consolidation going forward.

“When you watch this Goldman Sachs-United Capital deal,” he adds, “Goldman Sachs is a kind of marquee investment bank that is getting into the wealth management space. I think there are other banks that are going to follow suit. … I think it’s a bit of an alarm bell.”

The key drivers for firms to sell are to achieve scale and have a succession plan, says David DeVoe of M&A consulting firm and investment bank DeVoe & Co. in San Francisco. “We see firms that have $100 million or less that are excited to join a firm that is maybe half a billion. We see half-billion-dollar firms looking for scale, we see multi-billion firms that are seeking scale.” He believes that there are going to emerge a dozen or so megafirms that operate differently than smaller firms and serve clients differently. But he thinks smaller firms will continue to thrive since there are low barriers to entry and it’s a relationship business.

Clients might want more services, not just wealth management, investment management and retirement planning but tax planning, estate planning—even banking, checking and mortgage services. “These are all variations of scale,” says DeVoe. There are buyers who will pay premiums to have a CPA or law firm attached, he adds.

Tech Wars
Rising markets can make a balance sheet happy, but the tech arms race can burden it all the same. Carson and Hanson say the tech race is one of the biggest drags on a firm’s profitability and revenue. But such build-outs have been crucial, too, Hanson adds: “Three years ago, we had three people on our technology team. Today we have 14.”

Robert DiMeo of Chicago-headquartered DiMeo Schneider & Associates says his firm is rolling out a new CRM and portfolio accounting system, and it added a new website in the first quarter. Ozur says Lido is implementing a new CRM system and a technology that will assist advisors in the field with digital signatures.

First « 1 2 3 4 » Next
To read more stories , click here