The rising valuations of advisory firms and industry challenges running the gamut from the pandemic to the threat of new rivals were taken up by executives from Charles Schwab Advisor Services, Mercer Advisors and other firms during the online DeVoe & Co. M&A+ Succession Summit Monday and Tuesday.
Here are eight key takeaways from a couple of the Summit sessions ThinkAdvisor viewed:
1. Rising valuations are being driven by the large number of strong buyers.
“There’s more buyers today than there ever has been and there’s more capable buyers, and so when you have many seeking few there’s a natural tendency for price to go up,” Jon Beatty, COO of Charles Schwab Advisor Services, said during the “State of the Industry: Perspectives from RIA Industry Leaders” session that closed the event Tuesday.
The “quality of buyers” is what is driving these rising valuations because the firms buying today are “well-run organizations” that have “continued to evolve” and are more “sophisticated” than they were several years ago, according to David DeVoe, founder and CEO of DeVoe & Co.
2. Advisory practice owners really need to start succession planning.
All of the executives agreed on the need for advisory practice owners to start succession planning before health emergencies and other issues happen.
One key issue is many of them are afraid they won’t be involved anymore if they sell, Tim Kochis, special advisor at DeVoe & Co., noted. “People can work much later” into their lives today than they could in years past, but that doesn’t mean they can’t migrate leadership and management responsibilities to others at the firm while they are still active, DeVoe said.
And, as moderator Brian Hamburger, founder, president and CEO of MarketCounsel, pointed out: “Those conversations never get easier.”
3. Do an internal assessment before rushing into an acquisition.
Many owners of advisory firms think they want to acquire, but decide against it after they look further into it because they find it overwhelming and too complicated, according to DeVoe.
“I encourage anyone who’s contemplating going out and making acquisitions to start by [conducting] an internal assessment” first, he said, suggesting they ask themselves if they’re good at organic growth. “If you’re pretty good at that, depending on how big you want to get and how quickly, it might be better to invest more and more energy into that,” he advised.
4. Smaller advisory firms don’t necessarily have to invest in AI and other expensive technology.
Small and midsize firms can thrive without access to artificial intelligence, big data and other tech tools right now, according to Kochis, who noted: “Technology will become, as has always been the case … less and less expensive. It will become ubiquitous, available from lots of different sources. The custodians will come into play to provide a lot of that functionality to their clients.”
Five years from now, almost all advisors will have the tech capabilities of the larger firms, he predicted.
“Tim is absolutely right,” Beatty said, adding: “The cost of that [tech] will come down. Just like any moon shot, the technology gets cheaper when it comes to the consumer so there will be a trickle-down effect, for sure.”
5. The pandemic hasn’t significantly hurt advisors and has even helped them in several ways.
“I think 10 years ago … this pandemic might have had a much more substantial impact — a negative impact — on the independent wealth management space, given our lack of readiness to deploy remotely and the lack of professional management across the entire industry 10-15 years ago,” according to Hamburger.
To Beatty, the “lasting implication here is it’s taught us a lot of new tricks in our business…. It’s taught us how to operate in a virtual environment. It’s taught us how to work with clients in that way.”
Also, “I heard many advisory firms say ‘I now have a national footprint’ and don’t need to have offices in, let’s say, Chicago and Denver to have a presence in those markets anymore,” thanks to virtual capabilities, Beatty said. Many more clients are also open to virtual meetings now, so there is “less friction” in forging such relationships, he added.
There will also “probably be some long-term cost savings because we’ve all discovered that we can do things that don’t require physical space and don’t require commuting,” Kochis noted.
6. Diversity needs to be a priority in 2021.
“One thing that I hope is a focus next year because it’s becoming a really urgent issue for our profession and for our industry, and that is diversity,” according to Kochis.
“We will have to go out of our way to expand the diversity of our workforces with gender, color, ethnicity so we look much more like the market” that this industry serves, he said, adding: “It’s not only the right thing to do. It’s the smart thing to do.”
7. It’s not the robo-advisors the industry must worry most about: It’s the tech giants.
While it might not be a major issue in 2021, “I think the biggest threat to the industry is FAANG … organizations potentially entering our space,” DeVoe said, referring to the acronym used for Facebook, Amazon, Apple, Netflix and Google.
Traditional advisors are still being challenged by the “robo threat in some form or fashion,” he said. However, the threat of “a $100 million robo-advisor” pales in comparison to the tech giants, who “are AI and big data, and I think that’s a concerning element,” he noted.
Hopefully it won’t be an issue for 5-10 years, he said. “But if and when that aircraft carrier turns in this direction, they’re going to have a lot of artillery pointed at this industry,” he warned.
8. Despite challenges, there’s much to be optimistic about.
Despite the challenges of 2020, “I’m as excited about the growth prospects for our industry as I have ever been in 23 years in this industry,” Dave Welling, CEO of Mercer Advisors, said in a keynote on Monday. “Me too,” replied Ben Harrison, managing director and head of Advisor Solutions at BNY Mellon | Pershing.
— Check out Why Small Firms Should Relish the Effects of Consolidation on ThinkAdvisor.