More than a year after Citizens' Bank’s acquisition of Clarfeld Financial Advisors, John Bahnken, the president of Citizens’ wealth management division, predicted the rate of bank/registered investment advisor mergers was likely only to increase, saying it would be less than five years before clients expected RIA firms to offer banking services (and vice versa), a trend he attributed to client demand.
“People want that integrated experience,” Bahnken said in an interview with WealthManagement.com. “So one of the challenges that RIAs face today, even very successful ones, is if they don’t offer their clients banking services, lending and deposits, every time their client goes to buy something from one of the major firms, they’re going to be trying to sell them the investment products. So they’re going to try to take that away."
In a conversation that also touched on the state of the Citizens/Clarfeld merger, the regulatory landscape of the coming year and the bank’s newly unveiled digital platform for clients, Bahnken said mergers and acquisitions remained one of the fastest routes to being able to offer integrated services, saying no institution had “really cracked the code” on how to offer banking services in an RIA environment without ownership. Bank/RIA acquisitions have also accelerated due to the increased intermingling of banking and brokerage services after the Glass/Steagall Act was reversed in 1999. Bahnken said institutions had not explored true integration of services for the first 10 years after legislators revoked the law.
Bahnken’s confidence in the accelerated pace of bank/RIA acquisitions comes at a tumultuous moment for such transactions. According to a Devoe & Company report analyzing RIA M&A in 2019, banks represented 8% of RIA transactions in 2017 and 2018, reaching a high of 12% of transactions in the fourth quarter of 2018. But the report found that bank/RIA acquisitions plummeted in 2019, representing only 2% of total transactions last year.
The report partially attributed the drop to the “psychological impact” from the news in June that Luminous Capital, an RIA acquired by First Republic Bank in November 2012 for $120 million, would be leaving the bank with about $17 billion in assets, approximately 12% of the bank’s total wealth management assets. At the time, some questioned whether bank acquisitions of RIA firms was a wise approach, assuming that those firms would cross-sell banking products and that bank/RIA culture clashes would be insurmountable. At the time of the announcement, Jonathan Rogers, a co-managing partner at the RIA firm Forum Financial Management, said it was important to remember that the key relationship remained client/advisor, even after a merger.
“The person who owns that relationship and is at the center of that relationship holds the cards in these deals,” he said. “It’s not who necessarily owns the equity on paper.”
Bahnken acknowledged that bank/RIA acquisitions do not always work well, but Citizens strove to avoid these pitfalls by giving Clarfeld, a $6.6 billion RIA, a large degree of autonomy in their operations. Bahnken said Citizens took a different approach.
“Typically when banks buy RIAs, in my experience, they sort of hang them off the side, and say ‘we’ll try to send you some business when we can,’ and everyone loves the fee income, but it doesn’t always work,” he said. “We basically reverse merged our legacy private bank into Clarfeld.”
Bahnken said Clarfeld offered superior planning capabilities, including tax planning and estate planning, and offered an end-to-end digital experience for clients, while the legacy private wealth business at Citizens had loan and depository capabilities. Bahnken said Citizens was in the process of converting all of the bank’s legacy private wealth clients onto Clarfeld’s digital platform, as the bank found it superior to what they had previously provided clients. Clarfeld retained founder Rob Clarfeld as CEO after the merger, and last month the RIA announced that Rick Suarez would take over as president and CEO, with Clarfeld remaining as an executive chairman (Suarez has been with the firm since 1996).
“The point of view was that autonomy is really important to organizations like this, particularly if you like the culture of what you’re acquiring,” Bahnken said.