Business Transformation | 12.06.22
Wealth Managers Had Hectic 2022 — Doing M&A Deals
The pace of mergers and acquisitions within the wealth advisory space was fast in the first half of 2022. Fee-based money managers need to grow assets and revenues. Business combinations are one way to go in a grinding, low-return environment.
For the moment, money management M&A seems to be on pause.
Securities markets are losing more ground amid Federal Reserve money supply tightening, among other global macro shocks. Many potential sellers have decided to try to wait for some semblance of a rebound so as to improve their valuation metrics, according to WealthManagement.com.
According to the latest DeVoe RIA Deal Book, there were 203 RIA deals completed during the first three quarters of 2022, an increase of 23% compared to the first three quarters of 2021. Last year saw a total of 241 deals.
DeVoe & Co. predicts total 2022 transactions will top last year’s tally.
Scorching First Half
Looking at the wealth management transaction activity between January 1 and June 30, 2022, Fidelity Institutional, per Barron's, tracked 119 announced deals.
Among some of the more noteworthy deals were: Alera Group's acquisition of $1.5 billion-in-assets Johnson Brunetti; Edelman Financial Engines' acquisition of Smart Investor ($680 million in assets); and Hub International's acquisition of WealthPlan Advisers ($2.3 billion in assets).
Deals were still getting done in July and August, despite volatility connected with rising interest rates, and an economy that continues to make some camps of investors nervous — over the possibility of sputtering growth — while other investors fret about the prospect of too much growth as ammo for the Fed to remain hawkish for longer.
In terms of what's driving wealth management deal trends, said PwC's Gregory McGahan, it has in large part owed to aggregators/consolidators (of RIAs). "However, we believe the landscape of wealth management advice is changing," said McGahan, who co-heads asset and wealth management advisory at PwC. "Larger wealth managers continue to look for new and improved technology to digitize their wealth management offerings and deliver remote human advice, particularly as their client base trends younger."
Trends To Watch
UBS announced acquisition of Wealthfront for $1.4 billion is a prime example of a traditional player recognizing a shift among younger demographics, who seemingly preferring to make their own investment decisions, informed by data.
So-called "wealthtech" will not be the only key driver of wealth management deal activity when looking out over the next few months.
Retirement recordkeeping is a sub-sector viewed as ripe for consolidation and strategic alliances, which is a continuation of a trend that began a few years ago.
One of the biggest, highest-profile deals of the year — one that was announced but wound up being scuttled — involved the asset servicing space. To recap, custodian State Street Corp. earlier this year agreed to buy the investor services business of Brown, Brothers Harriman & Co. for $3.5 billion. The push to get this deal done had unfolded over more than one year. State Street sought to close this transaction fast, in a few months at the end of 2021, and then it was expected that the firm would pull away in its bid to become one of the world's largest players in the asset servicing space.
"We have determined that it is not in the best interests of clients, shareholders or employees to continue to invest time and resources in the transaction in this challenging financial services M&A environment," said State Street CEO Ron O'Hanley in a public statement released Nov. 30, closing the door.
Regulatory feedback, and potential transaction modifications to address that feedback, also contributed to State Street's decision to scrap the merger.
The firm of course remains an enormity, with $35.7 trillion in assets under custody and/or administration and $3.3 trillion in assets under management as of September 30.
Brown Brothers’ $5.4 trillion in assets under custody would have brought State Street right on the heels of market leader BNY Mellon, which counted $42 trillion as of September, according to the Boston Globe, per Banking Dive.
The asset servicing market consists of services for wealth management companies and capital markets. It includes services such as reorganization and proxy voting, as well as safekeeping for physical securities, the auto-reinvesting of dividends and electronic transfer of securities.
"The asset servicing industry is a critical but often unsung component of global financial markets," the Business Research Company said.
It plays a vital role in the safekeeping of financial assets, provides the infrastructure and connectivity for market participants and supports critical middle- and back-office operations of the world's investment funds, BRC said.
The deal also would have given State Street access to Brown Brothers’ coveted data-integration software, American Banker reported.
State Street's shareholders are said to be relieved that "they don’t have to pay peak prices for an asset that will take a long time to be accretive,” Thomas Hayes, managing member at equity manager Great Hill Capital, told Reuters on Wednesday, per Banking Dive.
The already lofty price likely came to be seen as prohibitively more expensive in a tightening economy, Hayes said.
Tough Environment, Creative Structures
Acquirers are dealing with inflation-challenged margins, falling market valuations and nervous lenders, whose non-performing loan books are starting to grow, according to WealthManagement.com. Many active RIA acquirers finance deals with debt.
Higher rates mean financing costs are going up. At the same time, assets under management are going down. And so revenues, based off fees earned on a percentage of assets, are going down as well.
Larry Roth, former CEO of Advisor Group and Cetera Financial and founder and managing partner of RLR Strategic Partners, has said in interviews that he’s starting to see a decrease in the valuations assigned to RIA acquisition targets. Multiples only recently were at about 20 times earnings before interest, taxes, depreciation and amortization (EBITDA); now, multiples are more in the range of 16-18x EBITDA, he said.
Roth said he’s seeing some change in deal structures with sellers cashing out in part, over time. So instead of selling, say, 100% of a book of business, some, said Roth, might sell 60% now and the balance at the end of three years — on the assumption markets rebound.