It’s been long expected that unprecedented wealth would change hands within families and across generations as the baby boomer generation retires and ages. That this shift should occur simultaneously with unprecedented shifts within the wealth management industry was perhaps less anticipated.
We’re seeing the wealth management industry consolidate at a staggering pace. M&A activity has been rising since 2014 and surged 237% from 2019 to 2023. In the first half of this year alone, there were 148 RIA transactions — up 17% over the same period last year. Today, 81% of wealth management firms are considering partnerships, consolidation and/or mergers and acquisitions to increase assets and capabilities.
According to a recent Cerulli advisor study that 55ip sponsored, among advisors who changed their broker-dealer affiliation in the past three years, back-office resources and technology were the two reasons most commonly cited. In times of change, support matters more than ever.
These structural changes can give advisors greater access to the solutions, technology and resources they need to enhance their businesses and their clients’ outcomes. But I’ve also seen the significant strategic opportunities that drive industry changes create significant tactical challenges — transitioning sometimes complex client portfolios with accuracy and speed, and at scale.
Done well, asset transitions are the critical first step in realizing the strategic business goals that drove the need to move assets in the first place. But done poorly, transitions can delay achieving those goals, reduce service levels, and potentially put clients and their money in motion again — out the door.
How then can advisor firms ensure that this critical step is executed appropriately?
1. The human element is critical.
Our experience has demonstrated, time and again, that the most successful asset transitions require the effective integration of sophisticated technology with human knowledge.
From coding updates to platform update schedules, it’s imperative that the service and operations teams across all involved parties have an in-depth understanding of the intricacies and differences between platforms, and of their connections to both custodians and investors.
We continue to see scenarios where a small number of accounts with missing information and/or paperwork have had the potential to create large-scale delays. The solution is both self-evident and sometimes underused in the industry — all data tables must be scanned in advance of critical processes, and exceptions evaluated systematically by experienced people.
Only by speaking all languages fluently can service teams act as a proactive liaison that’s able to anticipate potential issues before they become problems. Should an unscheduled data lapse occur with a particular custodian, the most effective and timely response requires an understanding of that custodian’s technical platform and the human beings that run it.
2. Use technology with a critical purpose.
Today’s technology facilitates more than direct, high-speed connections between asset managers and custodians. It closes the loop between asset transfers and the potential for enhanced investor outcomes.
Real-time access to and evaluation of liquidity restrictions and tax-lot level data can be used to effectively manage assets in a tax-advantaged manner, both during the initial transfer and beyond. Instead of transitioning a legacy portfolio into a new allocation in one step (and realizing all embedded gains), a tax-smart transfer pairs losses against gains in the source portfolio to minimize the tax impact of the transfer to a new allocation or model.
As markets and securities move, further transitions are made that take advantage of subsequent price movements to once again pair losses against gains. In this way, advisors and their clients control the balance between initial tax bill and portfolio alignment.
Here especially, the speed, efficiency and accuracy of well-executed portfolio transitions can directly improve investment outcomes. Tax-smart transitions and tax-smart portfolio management can take advantage of market declines now and not months from now. The extreme volatility that followed “Liberation Day” is an apt reminder that opportunities to harvest losses can be significant and yet fleeting.
Despite considerable technological advancement, the all-too-prevalent approach for even high-volume asset transfers is often spreadsheets. While better organized and better managed inputs lead to more efficient transfers, manual approaches reintroduce formatting issues, time lag and human error back into the process. Liquidity and trading constraints add further levels of complexity and much greater potential for delays.
The all-too common result: Instead of delivering on the promise of enhanced client portfolios, client service is hindered at a most critical juncture.
3. Realize and embrace the opportunity.
Our teams have heard stories of enterprise transitions taking months. Done efficiently, the timeline should be a few weeks — even at scale, with sometimes complex portfolios and when transferring assets into new target models.
Across account types, and investments, how assets are transitioned is the difference between client satisfaction and client turnover, and the difference between revenue targets met or missed.
For firms, the strategic impetus for the consolidation must be realized. For advisors, time spent on operational administration minimized and time spent serving clients maximized. And for the clients themselves, their satisfaction must be maintained and their outcomes improved.
For all, the benefits that follow tax-smart, technology-driven transitions at scale must be delivered, not just promised. With the right partner, they are within every firm’s grasp.
Michael Camp is head of client solutions for 55ip, a fintech committed to tax-smart investing and breaking down barriers to financial progress.
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