RIA merger and acquisition activity is on pace for a record year and positive industry forecasts have sparked interest from an uncommon group of buyers: U.S. banks.
Bank executives sense opportunity, with 44% considering M&A opportunities and 36% planning to create or acquire an RIA practice in the next three years, according to a recent report by Cerulli Associates.
Historically, banks have had an appetite for RIAs but done few deals. That could change in the coming years. Although banks accounted for only 12% of 181 deals in 2018, that percentage has been inching up while the total number of deals continues to increase, according to Echelon Partners, a Los Angeles-based investment bank and consulting firm focused on wealth and investment managers.
The greater appeal of RIAs isn’t a mystery. Wealth managers bring with them recurring fee revenue and another pool of clients to cross-sell products to. Cerulli asked top bank and trust executives to name their top reasons for being interested in RIAs and 82% said they wanted to increase fee revenues.
But it’s not all about revenue and profits. Banks want cash flow, and view investment management as a way to diversify their business while complementing other parts of it, like trust services.
In one of the largest-ever deals between a bank and an RIA, Goldman Sachs acquired United Capital Financial Partners in May for $750 million and said it planned to extend the RIA’s financial planning services to clients in other businesses.
“If interest rates continue to decline, net interest margins and income will probably narrow and decline, and adding businesses like investment management will look even more attractive,” Matthew Crow, president of valuation and advisory firm Mercer Capital, told RIA Intel.
For RIAs and banks, there might not be a better time to do a deal.
It’s a seller’s market. Valuations are full and older advisors have client books that will only get older (and be worth less). At the same time, bank buyers don’t have much incentive to wait around for lower multiples, especially if they believe interest rates will remain low in the near- or intermediate-term.
“There’s no guarantee that an eight multiple today will be a six next year. Wealth management creates a pretty durable stream of cash flow – every quarter that a bank isn’t in that business is a quarter without that cash flow,” Crow said.
Choosing to purchase an RIA and immediately bump up top-line revenue is not without risk.
Assimilating an RIA into a bank’s culture and compensation structure can be a tricky change to force on a wealth manager. But allowing an RIA to operate entirely independently could create tension with the bank’s other financial advisors and hamper the cross-selling of services, Basel Raslan, the manager of Aon’s Wealth Management practice, said.
“Deals can go really well if planned properly but they can go really poorly [otherwise].”