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echelon-deals-summit.jpg Image courtesy of FiComm Partners
(L-R): CAIS Chief Marketing Officer Abby Salameh, RDCL Co-Founder Alyssa Riedel, FMG CMO Susan Theder and FiComm CEO Megan Carpenter

Deals and Dealmakers: An M&A Deep Dive

Echelon Partners delves into wealth management M&A with industry experts at its 10th Deals and Dealmakers Summit.

Two hundred and forty financial service professionals gathered in Southern California last week to discuss the art and future of dealmaking in the evolving wealth management space.

Echelon Partners’ 10th Deals and Dealmakers Summit, reprised at San Diego’s InterContinental hotel after two pandemic postponements, offered attendees a deep dive into mergers and acquisitions in wealth management with a curated group of respected colleagues, potential partners and industry leaders from adjacent professions boasting a range of relevant expertise.

It also provided valuable insight from the very investment bankers who work to put the deals together. Echelon itself focuses on M&A specifically as it relates to the wealth management sector—referred to by multiple summit speakers as the “shining star” of the larger financial services industry.

On Market Volatility and Rising Interest Rates

“I think the biggest takeaway is that we’re in the right industry at the right time,” said Echelon Managing Partner Michael Wunderli.

According to Wunderli, Echelon is seeing “higher than ever” levels of activity, accommodating deal structures and sustained valuation multiples. He attributed the phenomenon to increased interest among private equity investors and, citing panelists from Cerity Partners and Mariner Wealth Advisors, the evolving sophistication of the most active buyers in the space.

Claire O’Keefe, a partner and head of corporate development at Cerity, and Cheryl Bicknell, COO and chief strategy officer for Mariner, were among 22 women featured at the conference out of 32 total speakers across 10 panels.

“Clearly, the downturn in the market is adversely affecting revenue and profitability for many firms,” said O’Keefe. “We view it as we're going to be partners for a long time ... and we think of growth and revenue synergies going forward as the opportunity. So, we kind of modify how we approach our structure to continue to make it exciting and motivating and be sure that both partners coming into the merger feel that it's fair and competitive.”

Bicknell declared that Mariner intends to bring on more than 4,000 new advisors over the next four years. The bulk of these are expected to join on the firm’s 1099 platform, she explained, with the hope that Mariner will become the affiliate’s obvious succession solution further down the road.

“We have more opportunities under letter of intent right now, probably, than any other period of time in our history,” Bicknell said. “And so, for us, nothing has changed. We are just making sure we’re having good conversations and helping everyone understand the opportunities as they become part of Mariner. Regardless of where the market is today, you still have the opportunity for growth.”

On Private Equity

Much of that opportunity for growth is coming from private equity investors, who are making increasing amounts of capital available to the wealth management space. Echelon Vice President Brett Mulder attributes the interest to the wealth management’s service-based business model, with its low overhead and recurring revenues, often tied to expense, and the attractiveness of the fragmented space with its “vast” array of potential targets.

According to Wunderli, greater private equity involvement is inevitable in wealth management. “This is what's happening. It's an inertia that can't be stopped. I think there are still those out there who have a little bit of a negative association, but private equity has been great. They've supported the industry and have created deal structures for advisors to really excel. I think that people are seeing this and they’re seeing the wealth creation that you get ... you sell your business, but you're still running your business. Now, you just have all these tools at your disposal and all these programs to create more wealth.”

According to Mulder, there’s a process that private equity tends to follow. A PE investor will look for a scaled wealth management platform to establish a foothold and acquire the platform’s capabilities before broadening the search to include a much wider variety of smaller firms that can be integrated.  

“If they acquire the platform firm at 16x EBITDA and then they're able to buy these smaller firms at, let's say, 12x EBITDA—that 12x EBITDA immediately starts trading at the 16x EBITDA, more or less,” he explained.

Mulder added that retention of a core advisor team and client continuity were “huge and important” to the successful integration of private equity–backed acquisitions.

During a mock debate with industry icon Mark Tibergian, who was honored at the event, Echelon CEO Daniel Seivert made the point that PE firms have seen internal rates of return on investments in the wealth management space that are up to 200% higher than the private equity average of around 15%. “This suggests to me that valuations have been too low,” he said. “[But] there’s recently been a major change in the competition which has caused the pendulum to swing back to advisors and they’re now getting a much better share.”

On Valuation

Most event speakers said they don’t see record valuations declining any time soon, due to ongoing competition and available capital, but the consensus was that indiscriminate application of high multiples is a thing of the past (for most of the major acquirers, at least). That being said, valuations can differ broadly based on several factors.

Under Echelon’s valuation method, for example, the growth and scale of a firm hold the most weight, followed by employee, client, firm and financial management practices. Slightly farther down on the list are the firm’s business model, transferability, marketing, productivity and economics. The combined factors produce a number that is then multiplied by a pro-forma EBITDA to arrive at an enterprise value.

Wunderli acknowledged that there are many ways to calculate the EBITDA, as well as the multiple, leading to vastly different valuations in some instances. 

“There are so many elements to what it means,” he said. “When you see these numbers in the news, you don’t really know what they’re basing it on. The whole process of determining what pro-forma multiple or EBITDA a buyer will ultimately use to base their offer on is a significant process that we go through carefully with the buyers.”

“If a buyer sees certain characteristics in a business outside of growth—if it's in a certain geography, if they have a certain specialization—maybe that's going to lead them to be more aggressive in the process,” agreed Mulder, “and that can drive valuation multiples higher.”

O’Keefe and Bicknell, for instance, both said that organic growth is not the most important key performance indicator they seek in prospective acquisitions. It’s a consideration, but client and advisor retention are far more important, they said, as their firms can provide the resources to facilitate organic growth to talented advisors who are in shorter supply.

On Marketing

In addition to marketing efforts to increase organic growth, both buyers and sellers must think about marketing themselves to potential partner firms, according to a trio of panelists from FiComm Partners, FMG and RDCL.

“Marketing can play a very big role in your valuations,” said FMG Chief Marketing Officer Susan Theder.

Theder, FiComm CEO Megan Carpenter, and RDCL co-founder Alyssa Riedel all agreed on a few key points: Transparent and honest representation is crucial; an attractive, updated and informative website (and the About Me page, in particular) is the single most important marketing tool a firm must have; consistent and clear communication with employees, clients and stakeholders is clutch; and there are some very cool fintech products that can streamline and scale most marketing processes.

“We build trust online,” said Carpenter. “We make decisions before we reach out. So, as a business, whether from an M&A perspective targeting advisors, targeting consumers or both, what are you doing to really create those human connections in a scalable way through how you're showing up across all digital properties?

On Deal Structures

While the volume of deals may have persisted through macroeconomic upheaval, firms such as Cerity are modifying their structures to account for market uncertainty. 

According to Jim Dickson, CEO of acquisitive RIA platform Sanctuary Wealth, the industry was probably due for a reality check, and the smartest dealmakers are looking for ways to allow all parties to protect and benefit themselves.

“I think we're all trying to figure out what to do with and how to be thoughtful,” he said. “You don't want to penalize the seller if it's a short-term downturn that recovers. Simultaneously, you're protecting your investment by making sure that what you're buying is going to grow and remain viable long term.”

“What I’m seeing for the first time is that you can still get that multiple you thought you had a year ago, but it's going to be done maybe with an earnout instead of all upfront," he said. 

On the Whole  

Discussions about firm culture, technologies, practice management, and how to reach the next generation of talent and investors suffused virtually every conversation at the summit, where attendees were also invited to sit down for one-on-one conversations with industry experts to pick their brains and explore potential partnerships.

“Wealth management is the shining star because of the amazing opportunities for entrepreneurs, for wealth creation, for creativity, for technology,” declared Seivert. “I think that to be successful, you have to be great with people and so there’s a higher bar there, but those of us in this industry are fortunate to enjoy that it’s filled with so many amazing people.”

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