As Published in InvestmentNews – RPA Convergence
(See publication here: https://www.rpaconvergence.com/)

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Mergers and acquisitions among RPAs in 2021 will far eclipse the transactions recorded in 2020, according to our friends at Wise Rhino Group. The hockey stick chart is in full effect.

The growing trend of retirement plan advisers seeking attractive business valuation multiples, a long-term strategic partner and scale has been well documented over the last few years. RPA aggregation has been primarily driven by insurance brokerage firms and institutional retirement consulting-oriented RIAs. We have also seen the wealth management-oriented RIAs enter the RPA acquisition fray, and RPAs should be paying attention.

It is no secret that margin pressures have significantly contributed to the pace of the retirement industry’s consolidation. But that same margin pressure might not exist for wealth management RIA aggregators. According to InvestmentNews’ 2019 Adviser Compensation and Staffing Study, 2018 assets under management fee rates returned to a high not seen since 2013 – nearly 0.78% – after dropping in 2016 and 2017. Thus, aggregators may be looking at the wealth management space as a more profitable and consistent business. When we review recent wealth management RIA M&A transactions, we find a few differences in established RIAs operating ecosystems that are less consistent within the RPA space. These fall into three categories.

The wealth management RIA space is more mature
Well established RIAs have more centralized operations and often feature repeatable service models, digital advice, a greater percentage of W-2 compensated advisers, a common investment management philosophy where the adviser is not deriving a portfolio of their own and shared equity ownership among employees beyond the founders. Repeatable service models where employees have an economic interest in retaining clients contribute to higher multiples.

Independent custodians partner with wealth management advisers in a competitive landscape
Independent custodians such as Charles Schwab, TD Ameritrade, Fidelity and Pershing fiercely compete for RIA dollars. As a result, many RIAs have open custody channels with more than one firm to objectively measure and monitor one from the others. These custodians typically offer a full suite of technology integrations, trading applications, adviser benchmarking surveys, marketing support, practice management and business consulting services. These additional services are usually available for no additional fee, even as the cost of trading equities has gone to zero. We can conclude that more services coupled with lower cost platforms further helps preserve margins. Many RPAs may not share that level of collaboration with their recordkeeper partners. Perhaps many even view them as competition!

Wealth management RIAs have an integrated tech stack
It is hard to overstate the impact integrated financial technologies has had on RIA multiples. Data flows automatically daily from custodians into customer relationship management, performance reporting packages, trading and rebalancing systems, risk capacity and other financial planning programs. RIAs can prepare for client reviews and deliver timely financial planning and portfolio assessment within minutes. The ability in this new screen sharing post-Covid environment to serve more clients in an average day is very helpful for retaining margins. Imagine an RPA world where basic record-keeping data such as investments, balances and participant head count automatically populate a performance reporting engine, risk assessment tool and your billing system. It is being done in the RIA space and – despite slow progress over the last five years – remains somewhat aspirational for RPAs.

RPAs could take a lesson from the RIA space and become more proficient in areas where established RIAs excel. It may very well be aspirational to match the RIA space given the inherently different nature of the clients, but if the M&A environment has peaked, RPAs constantly improving their proficiencies in these key areas may continue to command higher valuations.

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Important Disclosures:
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and it advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.