Chief Investment Officer
BirdsEye Viewachieving scale in the wealth management space
Wealth management, and investment management in particular is a scalable business. It takes one person to manage $10 of large cap equities. That very same person can manage perhaps $1B of such equities. So fixed cost is high, and variable cost is lower.
As banks search for sources of fee income and growth, they are mindful of the fact that the largest generation in history is Gen Y, and those Y'ers are approaching 30, getting ready to buy a home and start building wealth. At the same time, Boomers are retiring and beginning to transfer wealth. The opportunities in Private Banking and Wealth Management are growing, and so is banks' interest in the space.
Many bank CEOs are disheartened with the business, since the top line is typically very high but the bottom line quite skinny. They struggle to find the magic formula to improve contribution margin. That's where growth, again, comes to the forefront.
Unfortunately, growing the business organically is a long and arduous process. Customer acquisition is difficult and the sales cycle long. Dislodging customers from competitors is doubly difficult; average customer retention among our forum members in this space approaches 95%. The dilemma: how to grow the business rapidly enough to achieve significant scale economies, which are essential to improve profitability and contribution margin. The immediate answer acquisitions.
M&A activity involving private client services continues to grow around the globe, as players in the financial services industry realize the potential embedded in this space. As Aaron Dorr of Sandler, O'Neill tells me, global M&A activity has increased 20% in the past two years. Buyers view private wealth management as one of the most attractive growth opportunities in the asset management industry. Transaction number and volumes grew significantly since 2010, from $157B Assets Under Management (AUM) to $245B in 2013, from 22 deals to 47. Historically, asset managers and banks have been the most active buyers. Banks acquisitions of Wealth Management businesses now constitute a very small percentage of the transaction volume, whereas asset managers and others account for the majority of the deals. Not a single US bank acquired a wealth manager in 2013, the first time on record. US banks were also absent as buyers of institutional and retail fund businesses. Asset managers accounted for 60% of the former deal volume, and 78% of the latter.
Interestingly, deal size has been relatively small and quite digestible by community banks. In 2013 median AUM transacted for private client deals was $1.2B, 20% less than 2012 and almost half of the median in 2010. This makes sense, as smaller RIAs (Registered Investment Advisors) look for larger firms to partner with.
There are four types of buyers competing to acquire wealth management businesses today:
As you think through your acquisition strategy, keep a couple of topics in mind:
Purchases of asset managers require greater structuring than bank deals.
Your wealth management business is a perfect complement to the rest of your business. It can be an important product suite to serve your entire client base, and can be extremely profitable without being a capital hog. But growth is difficult, and growth is essential to scale economics and operational efficiencies. It is my hope that 2014 will see more bank deals in this space than in the past, and certainly more than in 2013!