The second half of 2021 should break all previously existing records for the number of mergers and acquisitions in the wealth management business. From what I’ve seen, there are three main factors driving the increase.
First, valuations of financial planning and wealth management shops are at all-time highs, and many firms are receiving offers that are difficult to refuse. Yes, a part of this is due to the bull market. As stocks push higher, so do client account balances, and with those, revenues and profit margins for the advisory firm.
But there’s a second factor driving up valuations that may be playing an even larger role, and that is that private equity has fallen in love with the wealth management space.
Many PE firms did extremely well aggregating insurance brokerage firms a decade ago and now see the advisory sector as the next best frontier. These firms have raised billions and need to find businesses to invest in so they can earn their management fees and carried interest.
This trend is reinforced by the fact that interest rates are low, and because private equity has access to favorable credit terms that don’t require any personal guarantees, this enables PE firms (and PE-backed advisers) to buy entirely on credit.
Those advisers that are considering doing some sort of deal within the next five years are taking the advice they’ve always given their own clients: Only invest in equities if you have a long-term focus. For those who think their time horizon may be shorter, it would be a mistake not to look at the options for selling that are available today.
The second major reason for the record surge in M&A is that many advisers are partnering with larger organizations so they can make a bigger impact while also having more freedom. In terms of their age demographic, advisers are a mature lot, and running a small business sucks up time and energy and keeps them from being able to do those things they most enjoy.
I’ve met many financial advisers who felt stuck running their practice and were rejuvenated once they joined a larger firm. Yes, they gave up some control, but they secured their financial futures, and their employees found paths to greater career options than they had while working for a smaller organization.
Lastly, according to the CFP Board, our industry currently has more practicing advisers over age 70 than under age 30. The third and final reason for the record uptick in M&A is that succession planning is an absolute necessity and many advisers, professionals who teach clients how to prepare for the future, are finally coming to the realization that they themselves need a plan in place that will yield a high value for their practice, seamlessly enable continued service to their clients, and provide a career path for their employees.
I certainly understand that many older advisers aren’t ready to retire. But with the nearly unlimited number of possibilities available for partnerships and those record high valuations, it would seem prudent to at least research your options, whatever your short-term professional goals may be.
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.