Registered investment advisors: How US banks can weigh the M&A potential

‍

Most US banks are investing in their wealth management businesses to yield fee-based revenue and expand client relations. These banks are recognizing M&A opportunities  to boost their wealth management goals. They're particularly interested in the fast-growing portion of registered investment advisory firms (RIAs).

In the United States, RIAs are an expanding niche of asset management and, at the same time, profitable too. Although due to high valuations, banks should not be discouraged from carefully considering acquisitions.

Whether and how a bank gets involved will be determined by its starting point and goals.

RIA assets and acquisition

In the US financial management market, RIA has been the concise segment. Unlike specific traditional advisor-centric wealth management systems, these standalone wealth management companies deliver advisory services (generating recurring fees from clients) rather than selling brokerage commodities with commissions and product-based income.

Onlookers are often impressed by overall growth rates, but they overlook two underlying forces altering the RIA landscape. First is at the top - a lot of consolidation. With 15 retail-oriented RIAs exceeding $20 billion in assets in 2020, increasing from eight in 2016, the largest RIAs are reaching institutional dimensions. During such a time, the average size of the ten largest RIAs increased by 2.4 times.

Secondly, at the bottom, there is fragmentation. The number of RIAs is rapidly increasing. Since 2016, more than 2,000 of the 6,000 retail-focused RIAs that exist now have been founded, and roughly 700 new RIAs are launched each year. As major advisors and teams leave brokerage firms, the number of new RIAs is expanding. (In 2020, the average wirehouse breakaway will have twice the resources of 2016.)

Unsurprisingly, these patterns have piqued the interest of financial backers. Three-quarters of Barron's Top 20 RIAs are now controlled in part or entirely by private equity companies or other financial firms, according to Barron's 2020 Top 20 RIAs. These investors are banking on three growth tailwinds: continuous advisor migration, high customer retention, and the model's efficiency.

RIAs are a profitable business.

Over the previous five years, RIAs have been in the mid-twenties for mean pretax margins, matching wirehouses, and for other wealth managers, median pretax margins are nearly double. Top-rated RIAs often earn 40 percent profits. 

This increased profitability is mainly due to RIAs using a payout structure that differs from broker-dealers. 

RIAs utilize salary-plus-bonus structures significantly more frequently than broker-dealers.

At-scale RIAs' valuations have risen as a result of private equity participation. 

Rapid, at-scale RIAs were valued at high-teens earnings multiples in current deals, up from low-teens earnings multiples five years earlier. 

It's no wonder, then, that many banks are scrutinizing RIAs as they seek to expand recurring fee-based businesses and strengthen customer connections. In contrast to essential retail digitalization initiatives and cloud migrations, promptly gaining scale in wealth management is critical for capital investment in several banks.

For more such updates, keep visiting the official website of Cogent Infotech.