A prominent figure in the North American wealth space ruminates on a spate of M&A activity, breakaways, and what this says about the state of the market.
Fresh M&A data and rumors of a possible UBS/Credit Suisse marriage all point to how scale is the name of the game in wealth management. On the flipside, however, some advisors uneasy at working in big shops will continue setting up on their own, a senior industry figure says.
“It is a business where there’s margin compression….it is happening on the revenue and on the cost side…the return on assets [RoA] – how much clients pay for advice – has been coming down slowly over the years,” Shirl Penney, chief executive and president of Dynasty Financial Partners, told Family Wealth Report in a recent call.
“Scale is continuing to matter more in the wealth management business,” Penney said. “On the cost side of the P&L, client expectations are going up. They want you to give estate and tax planning; they want help on the credit side as well as the assets side. They are willing to pay less on the overall relationship while demanding more. You see this in all aspects of our business.”
These are busy times in corporate mergers and acquisitions. Even though it is just a rumor at present, the possibility that UBS and Credit Suisse – both with big international wealth arms – could merge has certainly reminded industry figures about the competitive pressures at work. Meanwhile, Charles Schwab has just completed its $26 billion purchase of TD Ameritrade, highlighting tough discount brokerage competition. Figures from ECHELON Partners, the investment bank and advisor specializing in wealth management, also show that appetite for business marriages is as strong as ever. Among the tech firms working with wealth managers, the same kind of pressures apply. For example, earlier this week Japan’s NEC announced that it had bought Avaloq, the Swiss-based provider of banking and wealth management software.
A difficulty with mergers among all businesses is getting the teams and systems of both sides to gel.
“The challenges of where there is a merger/acquisition, there is usually a merger of systems….there are regulatory issues to do with the paperwork that has to be completed,” Penney continued. When advisors have to change platforms, very often, in such cases…..advisors have to “re-paper” clients and do due diligence for clients. This causes an artificial inflection point in their business - that inflection point may be the catalyst for advisors to consider going to another firm or setting up their own, he continued.
Penney’s own business, which offers a range of services to independent RIAs, often formed by breakaway teams from big wirehouses, has waxed in recent years. A few days ago it appointed Joseph D’Agostino to head strategic development at the wealth management advisory network. New RIAs are popping up almost once a month or more, often plugging into the Dynasty network. To take one of the more recent examples, US financial advisor Michael Leverty and his team partnered with Dynasty to transition their business, Leverty Financial Group, to an independent wealth management firm.
The pressure to expand via M&A is one that not all advisors are happy with, Penney said.
“We see a lot of competitors aggressively calling on advisors at the point of a merger or acquisition because of the disruption associated at their firm,” Penney said.
The pandemic has not slowed M&A, and may have increased it. Dynasty saw a pause in March during the heat of the turmoil, but otherwise a marked pick-up in demand over the last six months. Not only has it accelerated activity, but it has also accelerated digitization of the M&A and general advisor transition process, he continued.
Dynasty has been able, via e-signatures, digital channels and video, to manage onboarding new firms into its network. A complete and full transition can be handled in 60 days during the pandemic with the improvements in tech, clients being at home and support platforms like Dynasty helping every step in the process, he said.
The RIA growth rate has been spectacular: Schwab’s platform for RIAs has, in a decade, gone from around $400 billion to $1.8 trillion – they have seen more asset growth over that time than UBS has from inception to today.
The volume of M&A has prompted a variety of viewpoints. FWR recently spoke to industry figures about how multi-family offices are being affected by the changes.
While it is just a rumor – the banks aren’t commenting – Penney was keen to discuss the idea that UBS and Credit Suisse might tie the knot, in view of how it would affect North American wealth management.
“Credit Suisse does not have a big domestic US footprint – some, but not on the scale of UBS…..UBS is much larger…..more than 8,000 advisors…a number of those advisors may be put into motion,” he said. “For some it [a merger] would be the last straw….they will go it alone and set up an RIA.”
“The feeling is that for some time it [UBS] was becoming more of a private bank than the traditional US wire house. UBS left the broker `protocol’ in the US. By leaving it, UBS says `we own the clients and if you leave you cannot take the clients with you.’” A merger would mean that the private banking/international status of UBS would increase, changing the nature of its business in the US. “It is more of a private banking mode….more of a salary plus bonus model and upset advisors who don’t want to be in that environment,” Penney said.