The wealth management industry has experienced significant consolidation over the last number of years, but will 2022’s market turbulence put a pause to a multiyear record of M&A volume? Join Harris Baltch, head of M&A and Capital Strategies at Dynasty Financial Partners, as we discuss how buyers and sellers can be prepared for M&A and succession planning in current market conditions, how to leverage technology to improve M&A outcomes and a review of our M&A predications for the second half of 2022.
Transcription:
Announcer: (00:06)
Please welcome to the stage Harris Baltch, head of M & A and capital strategies for Dynasty Financial Partners.
Harris Baltch: (00:20)
Hey everyone, good afternoon. Thank you for, having me join you today to talk about, what's been a really hot topic in the wealth management space right now, M & A, and also discussing the backdrop, which is has been pretty volatile during the first half of the year. So to get started, I'm not sure how many people in the room just by show of hands are familiar with dynasty financial partners. Okay. It's about a third of the room for those of you that are familiar with us. Great. for those of you that aren't, I'll bring everybody kind of up to speed because the business model has, certainly changed and evolved and today dynasty really serves as a, wealth technology platform serving 50 different RIAs across the country.
Harris Baltch: (01:11)
We have close to 70 billion of, assets under advisement on average, the RIAs that we support are in kind of the upper echelon in terms of, in terms of firms, from a size standpoint, we have somewhere on average between 800 to a billion dollars of AUM per firm that we support. and it's really interesting because when the firm first started in 2010 was the first year that I started working in investment banking. and I covered the asset and wealth management space virtually my entire career. And, really over the past five years really started to plug into the independence movement called on a bunch of firms, including dynasty, and ultimately join them to help build out our M & A and capital strategies program, and it's really remarkable when you think about, where the industry is today and how really, what was once a cottage industry is now really in the beginning stages of its maturation.
Harris Baltch: (02:17)
But we support a ton of different types of advisors. We have over 300 advisors that are on the platform today. And on average, each advisor supports, over 200 million in assets, under management, in terms of the M & A solutions that we provide our clients, it really varies depending on where they are in their life cycle, so firms that are, getting ready to launch their new business we're gonna support them in getting their operating documents up to date and ready to accommodate all different types of situations, either internally among the founders or externally to support M & A, we also leverage technology to support M & A. So one, the cool, the cool tools that we use to support advisors it's called what it does, which is a pipeline builder, but we effectively work with advisors like you all who want to do M & A will basically leverage our databases and technology to come up with bespoke lists of advisors, either in the wirehouses or at other RIAs that kind of fit the profile of the principles that are looking to grow in organically.
Harris Baltch: (03:25)
And then we'll work with our in-house ad agency to provide a marketing campaign that really represents who you are, what you do not to the end client, but to other advisors, to create a call to action that hopefully creates a community of conversations that leads to some type of tuck-in, or perhaps acquiring another RIA, and like any financial advisor, we also provide clients with valuation reports. So depending on where you are in your life cycle and how you're thinking about M & A, it's not uncommon to offer equity as a form of consideration as part of doing M & A, the hard part is, a lot of firms and advisors that we speak to have never done evaluation. They don't know how much they're worth. And so we have a skilled team of, investment bankers that work with you all to come up with a fair equity mark in order to, use that as a consideration tool.
Harris Baltch: (04:23)
And it's good governance, right? It's good governance to do valuation, whether you're looking at how much you're worth internally from a succession standpoint or externally, if you're looking to do M & A, to acquire, acquire another advisor, but the trends are quite incredible, and we'll talk about what's happened in, the last six months shortly, but really over the past decade, you've seen record over record, transaction volume which continues, through today, deals are getting bigger because firms are getting bigger, right? And when firms are getting bigger and better, they want to accommodate more M & A, through, scale growth and acquiring other other like-minded advisors. But it's kind of interesting because right now our industry is faced with a tremendous headwind, right? There are more advisors that are looking to exit out of the business because of the aging advisor base that are looking to come in.
Harris Baltch: (05:22)
And while that creates a huge tailwind in terms of the industry, it creates a tremendous, tailwind in terms of M & A, and nearly two thirds of the advisors in the independent hybrid landscape are looking to transition out in the next 10 years, which represents over 50% of the total AUM in these two sub segments of the wealth management segment. So from an M & A, standpoint, it's really no surprise why you see the charts on the left and in the middle are what they are.
Harris Baltch: (05:56)
And there are different types of deal drivers, right? When it comes to comes to M & A, I mentioned scale as a major one with bigger firms wanting to get bigger acquiring other like-minded advisors, but there are other reasons, right? Succession. I mentioned capital, maybe taking some chips off the table as a preliminary tool, maybe to upgrade their capabilities, or maybe they want to expand into a different footprint. Maybe you're here in New York. You want to have a presence in Florida, or maybe you are in Texas, and you want to expand into California. Right. And so having a geographic footprint expansion is also an incredible deal driver. And that also helps kind of dictate what the ultimate deal type will look like. Are you thinking about just selling out a majority stake, or do you want to focus on maybe taking some chips off the table by selling a minority sale with a path to majority over time? It also depends on whether you're gonna do an internal succession deal and sell a small piece of your firm today to someone inside, and then maybe sell later on to them at at a different valuation or sell externally if your internal successor can't afford to buy you out.
Harris Baltch: (07:12)
But the first, six months of the year have been quite challenging, particularly with market volatility and with interest rates going up, the cost of capital is going up. And I think a lot of you all in the room know that in order to do M & A, there is typically some type of upfront cost, whether someone's leaving a wirehouse and has a deferred note, or perhaps they're looking to monetize a piece of their equity as part of a broader succession plan, there could be a lot of different variables that come into play, but with a higher cost of capital and RIAs or wealth management firms looking to transact at the valuations that they were hearing about last year is there a way to actually still accommodate those types of multiples that we all hear about?
Harris Baltch: (08:10)
And unfortunately, the answer that I'm gonna share with you all is the answer that most, most bankers would, would give their clients, which is maybe a lot of it really depends on who the firm is, right? What their historical growth has been both in terms of top line and bottom line, how sustainable is your revenue growth? what's the bifurcation of advisory versus brokerage? How sustainable is your organic growth, right? Not, not all businesses, not all revenue is created equal. And so what we always tell our clients is that when you're thinking about doing something strategic, really look at your history and track record of organic growth. Have you been able to acquire clients or bring in assets from existing clients in good times and in bad times, because if you've just been hiding in the shadows of the market for the past 10 years, it's pretty easy to see how valuations are gonna start to erode for your business in the first six months, like what we've experienced right now, having said that you've had a lot of new buyer entrances come into the space, you have private equity firms, you have family offices, you have private equity firms that back other wealth management platforms.
Harris Baltch: (09:31)
And so the buyer universe is big, it's daunting. And it's really hard to kind of understand and bifurcate the difference between what all of those different business models look like. You have firms on the east coast that are trying to expand on the west coast. You have firms on the west coast that are trying to expand on the east coast, and then you have firms out there that are just looking to buy anything and roll up firms and try to create synthetic scale, which will hopefully produce multiple arbitrage down the road. How do you understand, what the difference is and what the right fit is for you all? And that's, part of our job is to help educate you all on what that buyer mix looks like.
Harris Baltch: (10:11)
So in this type of market, how can an RIA best position themselves to obtain the best valuation? And I mentioned this before, it should be no surprise to you all, but really focusing on what you can control versus what you can't control, which is organic growth. A lot of firms like to cut costs during periods of sustained market volatility. But if you're thinking about doing something strategic, a haircut to cost is only a one time event, any potential buyer's gonna see right through that and need to make a determination as to whether that's something that's gonna be sustainable over time. And, so it's really important to identify if your cost structure is in fact sustainable in different periods of market volatility. And if you do decide to cut costs, is your client service going to be resilient going forward.
Harris Baltch: (11:09)
And it's also important to think about compensation, right? There are a lot of advisors out there that might own their own firm or, have partners that own their own firm. And, what you pay yourself as a percentage of revenue or a percentage of profitability is effectively one and the same. But when you're thinking about doing something strategic, a buyer is gonna look at your P and L and say, well, look I'm buying nine times outta 10, the profits of the firm. And if you've been paying yourself through those profits, and something happens to you, we need to make sure that our investment is protected and therefore we need to normalize your compensation to a fair value payout. And so it's really important to make sure when you're thinking about setting yourself up for something strategic, that you're normalizing your comp levels to a fair market, so that when a buyer comes in and evaluates you from the sell side, or if you're a buyer evaluating other RIAs that you harmonize your payout to what they're getting paid in order to embrace, commonality across all of the owners of the firm.
Harris Baltch: (12:20)
And when you have periods of market volatility, folks that thought that they could be sellers last year, and couldn't get it done, are now faced with a significant challenge as to whether they can participate in M & A or not. And, if your business is focused on doing M & A, this is a great time to really get much more aggressive.
Harris Baltch: (12:46)
So, what's gonna happen over the next six months, and it's really hard to predict but based on some of the headwinds that I mentioned before, whether it's around the need for succession, the fact that firms are just getting bigger and better, and they need to become more scalable by acquiring more advisors, or you just have folks that are just looking to take some chips off the table in good times, end in bad. You're gonna continue to see deal volume persist. In addition to that, when you're dealt with the headwinds of the market, you need to make sure that your business is set up for the appropriate level of scale, the appropriate level of cost, so that you can operate a profitable business during multiple market cycles. The good thing is if you're thinking about doing something strategic, there are just so many different types of M & A participants, and there are new ones that are coming in each quarter and there are old ones that are transitioning out of legacy investments and folding into new ones. And so therefore it's quite a robust market to do M & A right now. And you're seeing new private equity come in all the time.
Harris Baltch: (14:10)
And then with respect to multiples of, valuations, it's really going to depend on things like size profitability, track record for growth technology stack and whether your business can really integrate or become part of something that's much bigger. And so while valuations are probably coming off of, I don't know, a decade long high, we expect them to plateau, but I do think what you'll start to see is equity come back into the mix a little bit more than what you've seen in the past. I mean, typically what we're seeing now is down payments of deals well, in excess of 50%, and then you typically have, contingent payments. One is based on actually transitioning the assets over, and then you could have earnouts based on, on growth. And it's hard to hit your earnouts when the market is all volatile.
Harris Baltch: (15:13)
So that even kind of re emphasizes the importance of having a strong, disciplined approach to organic organically growing your firm again, either through blocking and tackling and bringing in new assets from new clients or from existing ones, but with valuations kind of are what they are. We would expect to see, more firms look to do valuations and think about ways to mark their equity and use that as an incentive tool to take advantage of what we hope to be more stronger valuation multiples through growth and scale going forward. So felt like that was quick. That was only 15 minutes. We've got about five minutes left for, for any Q & A, we'd love to hear from the group, if anybody has any questions, how many people out there own their firm? How many people out there have a real succession plan for their firm? So again it's a good thing to consider if you don't have an internal succession plan to think about valuation. Do you have a question? Yeah. Hold on. I have a microphone coming.
Speaker 3: (16:44)
Thank you. how have you guys been dealing with technology consolidation during an M & A transaction and how do you guys help navigate those conversations? It's something us as a technology provider get a lot from clients we work with. So curious as to your thoughts on that.
Harris Baltch: (16:58)
Yeah. I mean, you need to be set up for it, or you need to hire vendors to help you with, the integration, it's easy for a banker to kind of get the deal done, but the real work really starts after you sign, your definitive docs. Right. Which is something I didn't fully appreciate in banking, but now being part of dynasty where we provide, full middle and back office support to help integrate, both firms at launch and then, through doing things like M & A, I fully appreciate now. it really depends on, the tech stack cuz it, It encompasses a lot of different things, right? You've got your custodian, right. And if you're not a multi custodian platform, you're gonna have to Re paper and Reacap those assets over from from one brokerage firm to another, right.
Harris Baltch: (17:44)
If you don't have those relationships intact, that could be, be a challenge, but it's something that we deal with all the time and it's very doable, Then you have things like CRM, right, I've got a firm who's based on exclusively on Salesforce and they're looking to acquire a firm that that's exclusively based on Redtail. Right. How do you merge those things? When, the firm that's getting acquired has, 500 clients and 900 leads, right. That could be incredibly daunting, we have it staff that deal with that all the time. Right. And so it takes a lot of time. You have to have a plan, you have to map it out, but you have to have the right infrastructure support and people that actually know what you're doing.
Harris Baltch: (18:34)
Then you also have certain integrations around, financial planning tools and stuff like that again our experience because we kind of do this every day is that we deal with that type of integration. I'd say the biggest challenge quite frankly, is when you're going out and getting consents you want to explain and have a really good story and rationale as to why you're doing it, the deal in the first place, because, in addition to it being a headache for the operator, right, for the actual, advisor or wealth management firm, it's also a headache for the clients, right. They need to understand why is the deal getting done? What's the rationale, why am I signing, this new investment advisory agreement, because I was, are you still going to be my advisor going forward? Right. So, there's, there's a whole equity story that needs to get laid out. In addition to, just the technology consolidation. That's a good question.
Harris Baltch: (19:47)
Through what the question was a smart contract. Well, you see firms that set up buy, sell agreements all the time, right. And God forbid, if something happens to an advisor or a principal, a buy sell contract is really designed to alleviate that at the end of the day, we see firms that transact for a variety of different reasons and a buy sell contract may feel really good at the time of execution, but circumstances change all the time and that buy, sell contract isn't, fluid to necessarily accommodate how situations change going forward, which is why, we get involved pretty early on with helping firms think through, M & A and succession and help educate them on the market so that they can create a strategic outcome that that's right for them. I think that's all we got, but I really appreciate everyone's time. Thank you.