Integrators Or Aggregators? Where Long-Term Value Is Best Realized

Aggregators Should Refocus On Strategically Forging Integrated, Centralized Platforms For Increased Valuations, Efficient Advisors And Better Succession Execution

As we close out another record year for M&A activity in the wealth management space, serial acquirers are taking stock of an industry that has been impacted by a challenging market and the persistence of historically low organic growth rates.

Feeding frenzy

An increase in the cost of capital on top of “nosebleed valuations” have private equity-backed acquirers poised to take a breather in 2023, anticipating further market turmoil and a recession. In fact, DeVoe & Company points to plummeting transaction activity in the most recent quarter and expects a tepid beginning to 2023, and Republic Capital anticipates a much more discerning purchasing approach in the months ahead.

In recent years, there was a feeding frenzy in the highly fragmented RIA industry, as acquirers competed for the attractive margins and cash flow associated with these businesses. Strategic deals that create true, long-term value were outnumbered by asset grabs, as the 12-year bull market made the economics and ROI of an acquisition exceptionally attractive, especially considering the abundance of cheap capital. 

Lost In The Shuffle

A centralized platform

However, the strategic justification for the approach may have been lost in the shuffle, as rising markets and ballooning AUM papered over a less-than-buttoned-down approach. 

One notion that fell by the wayside is the creation of true enterprise value within a firm growing through acquisition based upon strategic factors, including a common operating platform that leans on technology, leverages repeatable and scalable processes, and relies on centralized operations, marketing, finance and compliance to efficiently serve newly acquired advisors and firms. 

In short, aggregators rather than integrators dominated industry M&A, and now firms should break from the feeding frenzy and return to a strategy of creating integrated platforms. 

Valuation, Succession & Efficiency

The two key advantages to developing an integrated business after acquisitions are the resulting increased enterprise valuation and the ability to successfully transition practices where a selling advisor is looking for succession planning. 

The market has always rewarded the valuations of firms that use a repeatable process. Mark Tibergien’s groundbreaking book on this topic, “Practice Made (More) Perfect,” extolled the importance of sound management, organizational design and a strategy of building a business versus a hodgepodge of client relationships. 

Because so much M&A activity is predicated on the creation of a succession solution for an industry that has done a terrible job of orderly transition planning, emerging mega-firms must ensure that practices are standardized to make succession transitions efficient and contain leakage of assets. 

Further, the only way an acquirer can effectively position a purchased practice for strong growth is by relieving the advisor from mundane, non-revenue generating activities like billing, compliance, operations, trading, financial planning and, yes, investment management. 

Next Steps For Aggregators

Relieve advisors from the mundane

I predict that aggregators will begin to work toward common operating platforms by standardizing their financial planning and investment approach while continuing to rationalize back-office functionality. Some firms may find this difficult, as acquired firms resist change and the acquirer’s leverage may prove weaker than imagined.

Platforms will need to align planning with investments and allow advisors the ability to update plans and have those updates simultaneously adjust the investment portfolio. 

These moves will require investment and strong strategic leadership, but successful acquirers will have better valuations, as the ultimate purchasers of these mega-firms will be happy to reward truly integrated businesses. 

Matt Regan is President of RIA platform Wealthcare.

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