Given that 2015 was such a busy year for M&A in the US wealth and asset management industry, this article outlines the trends that influenced deal activity, and associated challenges.

With 142 deals announced, 2015 was the strongest year in a decade for the US wealth and asset management M&A activity, according to a recent report by PwC. In the wealth management sector alone, the number of deals soared to 82 from 29 in the previous year.

Among the most high profile transactions covered by this publication was Raymond James’ acquisition of Deutsche Asset & Wealth Management's US private client services arm for an undisclosed sum and the sale of Barclays Wealth and Investment Management in the US to Stifel Financial for $74 million. Another big move was First Republic’s acquisition of Constellation Wealth Advisors, valued at $115 million. In the background, meanwhile, M&A was also abuzz among smaller, boutique advisory firms and RIAs.

In its report, entitled US Asset and Wealth Management M&A Insights, PwC pointed to a range of themes that are influencing M&A activity. Some are expected to impact the near-term, while others will continue to shape activity in the future. They include: a decrease in valuations; a rise in independent manager deals; economic uncertainty; continued consolidation across all sub-sectors; minority interest deals remaining popular; changing investor demands, driven in part by shifting demographics; significant involvement of private equity firms (buying and selling); new technology; and product innovation. The changing regulatory environment, and the associated costs of compliance, is also worth noting.

The US market is “tremendously competitive right now,” Sean McKee, who heads up KPMG’s public investment management practice, told Family Wealth Report. Firms are finding it increasingly difficult to compete as developments in technology continue to unravel at an accelerating pace, information becomes more accessible and robust, and investors pay closer attention to the value they are receiving on a number of fronts such as ROI and wealth reporting.

As industry competition in turn heats up, some players are struggling to flourish because they lack the scale required to grow. While M&A has offered many firms a viable growth path, others have concluded that the opportunity simply isn’t there for them, and so have exited the sector to focus on other core business areas, McKee said.

Last year, for example, Credit Suisse unveiled sweeping organizational changes including scaling back its private banking brokerage business in the US, which it said wasn’t positioned to compete in scale without significant investment or by acquisition.

“Given this limitation, the economics for Credit Suisse do not yet meet profitability criteria and, therefore, cannot achieve optimal returns for our shareholders relative to our alternatives,” the Swiss firm said at the time. “As a result, we have taken the decision to transition our current private banking brokerage business model and better leverage our investment banking and asset management capabilities for US UHNW clients.”

By contrast, some providers to UHNWIs are tapping into the mass affluent segment as they see these individuals as a stepping-stone to future ultra-wealthy clients, McKee noted. However, again, this often creates issues around scale - specifically as it relates to converting mass affluent investors into UHNW clients with complex wealth management needs that often go beyond just investments.

Challenges

Despite 2015 having been a hotbed of M&A activity in the US asset and wealth management space, dominated by private equity firms as buyers and sellers, deal valuations were hit by volatility in global equity markets and higher levels of uncertainty in many sub-sectors, PwC said in its report.

Meanwhile, those recently polled by KPMG for its US Executives on M&A: Full Speed Ahead in 2016 survey highlighted a number of challenges they anticipate the financial services sector will face this year in deal-making, including: valuation disparities between buyers and sellers, uncertainty in the regulatory environment and stiffer government oversight, and identifying suitable targets.

“Market volatility is creating a gap in the bid spread on deals – what buyers want to pay versus what sellers want to get,” McKee said. “That will narrow as markets settle and with the passage of time, because what’s creating this is the fact that many businesses do need to be transformed. What we’re seeing is a tipping point where people are getting more realistic when it comes to assessing their growth opportunities.”

The US wealth management sector is still relatively young and therefore very fragmented, particularly beyond its largest participants. Few businesses were built with robust technology backbones and leeway for capital expenditures to innovate alongside rapidly evolving client demands, McKee said. Indeed, there was a “significantly increased level of focus in technology and an increased number of M&A deals to acquire such technology,” particularly in the robo-advisor space, according to PwC’s report. Smaller firms will likely be incentivized to merge with larger players to remain competitive and relevant to investors in 2016, it added. 

The key question, according to PwC, is how sustainable is the volume of transactions seen last year?

“We believe this incredible increase in deal volume is not likely to be sustainable,” the firm said. “We think much of the increase in deal volume was driven by those independent managers who have delayed their transactions for many years until the market reached a more normalized level.”

While PwC doesn’t anticipate that deal volumes logged in 2015 will be replicated this year, the firm forecasts a “robust deal environment” given “key fundamentals” in the space - so long as market volatility calms down. Buyers and sellers with a pressing strategic rationale will probably “make it work” (through using contingent purchase price mechanisms, for example), and those who are less eager may wait for a more stable economic environment.

In wealth management specifically, it also mentioned a “continued pursuit of the aggregation model and strategic expansion of RIAs, both regionally and nationally.” Indeed, commenting on recent RIA sector data, Jonathan Beatty of Schwab Advisor Services said that although there was an uptick in M&A activity in 2015, “we don’t necessarily see an indication that firms are viewing M&A as a preferred means to achieve scale.”

“Certainly for some firms it makes strategic sense and current conditions make this a good time to act,” Beatty said at the time. “But many firms are continuing to follow a multi-faceted client growth strategy, by winning new clients and continuing to earn the trust of existing clients, thereby increasing share of wallet. M&A continues to be part of a broad set of growth strategies advisors have to consider alongside such industry best practices as creating operational efficiency and attracting and retaining top talent.”