Uncategorized September 25, 2018

PANC 2018: The State of Adviser M&A

With industry statistics showing that 25% of advisers have changed firms in the last four years, there are clearly many advisers in pursuit of the right business model.

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What’s the right business model and home for your practice?

These questions were front and center during the first day of the 2018 PLANADVISER National Conference, which kicked of Monday in Orlando.

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During a panel discussion aptly titled “The State of Adviser M&A,” Rick Shoff, managing director of CAPTRUST Financial Advisors; Dick Darian, CEO of Wise Rhino; and David Reich, national president for retirement services at HUB International Investment Services, all gave their prospective takes on whether and how the retirement plan advisory industry is undergoing consolidation.

With industry statistics showing that 25% of advisers have changed firms in the last four years, the panelist all agreed that many advisers are clearly in pursuit of the right business model. While their individual firms each take a different perspective on adviser industry M&A, the trio emphasized the importance of differences in business models when it comes to ownership of firm, decisionmaking structures, personnel structures and support, core competencies, product and service focus, and how all of this is evolving.

Responding to some impromptu polling, the majority of those advisers in the audience who suggested they would like to either sell or buy a practice said they wanted to do so within the next one to three years. While the poll was far from scientific, the panelists all said they were not surprised to see such enthusiasm for M&A activity. A second series of poll questions showed the audience was pretty much split evenly on the question of whether they have a formal succession plan or business continuity plan in place today.

Asked to speak generally about the thought processes behind adviser M&A activity, Shoff suggested that “there needs to be a very strong catalyst before making a move is the right thing to do.”

“There has to be a specific, undeniable need you have tried to solve for some period time, unsuccessfully,” he explained. “I would stress that being curious is not a catalyst, and the final decision to either sell or buy a firm—or to enter a new affiliation model—involves both the head and the heart.”

The panelists agreed that it is a good idea, though seemingly simplistic, to force oneself to put the rationale of any M&A transaction into writing. The written plan must answer two key questions: Why aren’t you able to solve an issue on your own? And why do you believe others might be able to help you do this? It is best to do this work well in advance of any planned M&A activity. 

“I started my business because advisers do not know how to answer these questions,” Darian said. “One way to explain this is that the typical advisory firm owner focuses so much more on the practice than on the business. Very few firms formalize their thinking about the practice as a business that could be valued, bought or sold. In my experience, I don’t think many advisers can honestly assess their strengths and weaknesses and compare this with what is available out there in terms of buying or selling capabilities. It’s very complex and very emotional work to do. Many people are not prepared even to understand where they stand today, let alone where they should go.”

When it comes to doing this work, Reich suggested advisers put on their equity analyst hats.

“If you want to start to define what your practice might be worth, the numbers obviously matter,” he noted. “How big is the business, and is it growing, staying the same or shrinking? In my company, importantly, we are also not just looking to buy a book of business and send the adviser packing. We want them to come in and continue those relationships. That is a huge part of the value of any advisory business.”

“Another important point is that any final valuation is not just about the multiple,” Schoff concluded. “Six- to eight-times free cash flow is an average right that we are seeing in new deals, but it varies tremendously based on size of the firm and based on the character business itself. Remember, if you get up to eight-times but you have to whittle down the cash flow to get there, that’s not going to be as good as seven-times with a greater cash flow figure.”

In Practice September 25, 2018

PANC 2018: The Future of Retirement Advising

A look at consolidation, the role of recordkeepers and the importance of financial wellness programs.

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Advisers at the 2018 PLANADVISER National Conference’s “The Future of Retirement Advising” panel said even though the Department of Labor’s (DOL’s) fiduciary rule has been vacated by the 5th Circuit, it has prompted consolidation of practices.

“We grew 66% last year and expect growth of 80% this year,” said Vincent Morris, president of Resources Investment Advisors. “That was driven by consolidation and advisers needing help on the rule. We are an aggregator. Companies can remain independent and have access to scale, innovation and financial wellness programs. They are under margin pressure and more demand from sponsors for services, so I think we will continue to see that scale.”

Edward O’Connor, managing director with Morgan Stanley Wealth Management, agreed, saying, “We definitely see consolidation. It is harder for generalists to seek out opportunities because there is a higher standard of care for the 401(k) business.”

As for working with recordkeepers, Jon Anderson, head of retirement plan solutions at Cetera Financial Group, said that advisers will become more selective about which companies they work with: “Advisers need to align with organizations that will support them. Advisers can’t do it on their own.”

Resources Investment Advisors works “with  56 recordkeepers, which is unsustainable,” Morris said. “We want to bring that down to 12 in order to have pricing and resource leverage.” Resources Investment Advisors would also prefer to work with recordkeepers that offer “more of a partnership,” he said—“managed accounts, financial advice, an economics play. We will be interested to see how this pans out in the next five to 10 years.”

Currently, Morgan Stanley Wealth Management “scrutinizes recordkeepers, performing due diligence on how they engage with participants,” O’Connor said. Morgan Stanley also prefers to work with recordkeepers that can “train our advisers to be specialists,” he added.

A poll of the audience found that 51% offer proprietary education to plan sponsors and participants, with 39% obtaining the resources from recordkeepers. Ninety-five percent said that these programs include comprehensive financial wellness, such as budgeting, college savings and insurance. Sixty-three percent of the audience members said that they or their team offer investment advice.

Alison Cooke Mintzer, editor-in-chief of PLANADVISER, then asked the panelists how they manage their fiduciary responsibilities while offering holistic financial wellness programs.

O’Connor said that “participation rates have leveled off, because of financial stress. Participants need help budgeting. You need to go there. Financial wellness is about education first.”

Anderson said that offering financial wellness goes a long way towards “driving participant engagement. Working with advisers improves all metrics.”

In order to be able to deliver that education and/or advice, advisers need to rely on “digitization,” Morris said. “It is disrupting the marketplace. We cover 500,000 participants. In order to drill down and touch enough lives, we need a digital process.”

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O’Connor said that Morgan Stanley Wealth Management has offered a financial wellness program for the past few years in order to drive participant “engagement and address their issues. There is a giant, growing base of people with debt issues, especially student loans,” he said. “We encourage plan sponsors to hold webinars on budgets and student loans. You shouldn’t be just a retirement specialist but a broad-based adviser. By doing so, you are really helping a core concern and tightening your relationship with the plan sponsor.”

Cooke Mintzer then asked the panelists what tools retirement plan advisers will need in the future. Morris said that the industry model is currently “B to B,” or business to business. In the future, he said, it will be “B to B to C,” or business to business to consumer. “We are in the C-suite, talking about their employees’ financial needs. The end client relationship is what needs to happen. Retirement plan advisers will still be specialists, but their scope will be expanded to talk about people’s holistic financial picture.”

O’Connor agreed with that model, saying, “We know that participants need a lot of help. We can offer a multi-channel solution, or it could be self-directed. We are in a full-employment economy. Companies are hard pressed to find workers. There are 3.5 million jobs that cannot be filled. A financial wellness program is a small investment but reaps many benefits.” By offering such a program, “you are telling your employees you care about them.”

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