In Practice March 31, 2023

Adviser M&A To Stay Strong in 2023, but Expect Delays

Advisor Growth Strategies reports that dealmakers are getting more creative amid high interest rates.

Reported by

The dealmaking for registered investment advisers seems to have peaked in 2022 in terms of volume, but private capital is still intent on getting more acquisitions done in 2023, according to a recent report from Advisor Growth Strategies.

Of 85 advisory firms surveyed about M&A activity, a whopping 86% said a rocky 2022 did not change plans to look for a partner or pursue M&A as seller, according to the Phoenix -based consultancy. There were 225 transactions in 2022 as tracked by AGS and Fidelity Wealth Management, according to the researchers.

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Forecasts of a slowdown in 2023 track with recent research from M&A watchers Echelon Partners and DeVoe & Co., the latter of which reported in February a 22% decline year-to-date versus the same period last year. Consolidation has been rampant in the past decade as an aging RIA industry meets strong demand for wealth management, including by firms with retirement advisement practices. But that began to shift amid volatile markets and rising interest rates in 2022, according to the authors of the report.

“For the first time in several years, deal expectations were not matching reality, and buyers and sellers had to collaborate to move transactions forward,” wrote AGS Managing Partner John Furey and Principal Brandon Kawal.

This year buyers may be more selective in their deals, giving a high level of scrutiny to talent amid a tight labor market, the authors wrote. Increased interest rates could also put pressure on buyers that rely heavily on debt, likely slowing down some dealmaking.

Part of what will make deals harder to hammer out is a continued shift toward less cash payment and more “collaborative” structures based on firm growth, according to the authors. In 2022, cash deals fell to 67% of transactions, as compared with 77% in 2021. Meanwhile, the percent of equity deals—based on shared outcomes—rose to 25% from 21% the year prior. Contingent deals, which are based on earnouts, jumped to 8% from 2% in 2021.

“The early shift to long-term consideration (equity) and contingent payments (earnouts) signaled the market will become more collaborative as buyers seek to conserve cash and sellers look to make transactions less point-in-time,” Kawal and Furey wrote.

Deals may also be smaller in size “than the rush of $1b+ AUM deals we saw in 2020 and 2021,” the authors wrote in an emailed response. “We also saw overall valuation (not multiple) drop for the first time in our tracking.”

The analysts are still bullish that dealmaking will happen, in part due to the continued push by private equity to find growth in consolidation.

“The influx of capital from private equity bodes well for continued M&A activity, whether investments are made directly or through other firms,” Furey said in a statement with the report. “Teams seeking enhanced resources and business continuity solutions through a transaction still have a fantastic opportunity to find a great result, but they may have to work harder to get it.”

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Data & Research March 31, 2023

Social Security Trust Fund May Fall Short One Year Earlier Than Expected

Social Security's largest trust fund may be depleted in 2034, one year earlier than previously estimated, according to its Board of Trustees.

Reported by

Remy Samuels

The combined asset reserves of the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund are on track to become depleted in 2034, according to the Social Security Administration Board of Trustees’ annual report, which was released Friday.

The depletion is expected one year earlier than was projected last year, with payable benefits projected to fall to 80% of expected levels.

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The report projected that the OASI Trust Fund, on its own, will run dry in 2033, one year sooner than last year’s estimate, with 77% of benefits payable at that time. Meanwhile, the DI Trust Fund asset reserves, on their own, are not projected to become depleted during the 75-year projection period ending in 2097.

In 2022, the asset reserves of the combined OASI and DI Trust Funds declined by $22 billion, coming to a total of $2.830 trillion, according to the report.

The combined reserves of the OASI and DI funds, along with projected program income, are sufficient to cover the expected program cost over the next 10 years, but the report states that the ratio of reserves to annual cost is projected to decline from 204% at the beginning of 2023 to 96% at the beginning of 2029. The ratio is expected to remain below 100% for the remainder of the 10-year short-range period.

This means the OASI and DI Trust Funds, taken as a combined unit, fail the Trustees’ test of short-range financial adequacy. Considered separately, the OASI Trust Fund also fails this test, but the DI Trust Fund satisfies the test.

Social Security’s total cost is projected to be higher than its total income in 2023 and all later years. Total cost began to exceed total income in 2021, and the cost has exceeded its non-interest income since 2010.

Total income, including interest, to the combined OASI and DI funds came to $1.222 trillion in 2022, while total expenditures from the combined funds were $1.224 trillion, the report stated.

In addition, Social Security paid a total of $1.232 trillion in benefits during calendar year 2022, and there were about 66 million beneficiaries by the end of the year. An estimated 181 million people had earnings covered by Social Security and paid payroll taxes.

According to the report, it took $6.7 billion to administer the Social Security program in 2022, which was reported as 0.5% of total expenditures.

The Social Security Administration Board of Trustees recommends that lawmakers address the projected trust fund shortfall in a “timely way” to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.

“Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits,” the Trustees’ stated. “Social Security will play a critical role in the lives of 67 million beneficiaries and 180 million covered workers and their families during 2023. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”