RIAs and MFOs representing $1 trillion in assets managed on our platform recently joined us at the Addepar Summit. Our conversation turned to some of the hottest topics in wealth management including mergers and acquisitions, talent acquisition and retention, and how advisory teams are planning to use AI. 

RIAs embrace AI to focus on strategic work

The Summit kicked off with an interactive panel discussing the transformative role of AI in our industry with a focus on innovation, data governance and human-machine collaboration. Panelists explored the contrast between AI experimentation and large-scale implementation, noting that while AI tools enhance efficiency, the financial sector has yet to truly unlock its potential for creating new revenue streams.  

Attendees agreed that AI's strength lies in automating repetitive tasks. This allows investment professionals to focus on high-impact, strategic work. However, panelists stressed the importance of disciplined data security and governance to ensure responsible AI use. Panelists urged firms to monitor where sensitive data resides and maintain strict access controls.

A key discussion revolved around AI's impact on jobs. Panelists emphasized that AI augments roles rather than replacing them, amplifying the effectiveness of experienced advisors and client service teams. Uniquely human qualities like relationship-building and instincts remain critical in advisory roles, making AI a tool for enhancement rather than replacement.  

A key takeaway was that AI, when combined with human expertise, allows investment professionals to be more strategic and effective. With the right balance of governance, flexibility and collaboration, AI will drive the next wave of innovation in wealth management. 

Navigating the rising costs of mergers and acquisitions

Consolidation continues in the industry, though the size and complexity of these deals have changed. An area of great interest and discussion at the Summit was the rising cost of acquisitions. Reports of multiples hitting as high as 24x EBITDA stirred debate, with firms cautioning against overpaying. The 2024 Mid-year RIA M&A Market Report from Family Wealth Report found the “overall industry average for multiples was around 10 times EBITDA last year.”1 Additionally, their report states the “multiple range for RIAs under $500 million AUM  are rising, and now range from approximately 8 to 11 times EBITDA.”

Disciplined deal-making becomes increasingly important in this high-demand environment, where firms are seeing increased competition for quality targets. Several Summit attendees shared the importance of walking away when valuations become too inflated. Despite high costs, firms remain focused on acquiring teams that align with their culture and strategic goals, and offer potential for growth. 

Culture and client retention

The most successful M&A deals according to Summit attendees focus on three key factors: cultural fit, leadership alignment and operational cohesion. Cultural alignment was seen as a potential deal-breaker, with some firms walking away when cultures didn’t match up during due diligence. More than one firm shared that they were not always the highest bidder in a closed deal – again emphasizing the importance of culture. 

Another big question in the M&A process is, “How will clients respond?” While firms reported client retention rates upwards of 98%, they attribute this success to transparency and clear communication. Clients want assurances that their advisor relationships and client services teams won’t change. It’s also important to help clients understand the value proposition of the acquiring firm and their potential to deliver value beyond what was previously available. Whether it’s holistic wealth management, tax services or access to specialized expertise, keeping clients informed of the benefits of acquisition is critical to maintaining their trust and their business.

Talent strategies for future growth

When asked about strategies for future-proofing their firms, RIAs and MFOs discussed the importance of finding and encouraging the right people to join and grow with their firms. Some leaders emphasized the importance of hiring learners, people with curiosity, rather than focusing solely on more experienced candidates. 

Firms highlighted the importance of thoughtful succession planning and looking ahead to ensure smooth leadership transitions. They employ different approaches to building younger teams from the traditional mentor-mentee approach to aligning roles to strengths and weaknesses – information they gather through a variety of assessment tests. Some firms are even setting retirement ages, as seen in other professional services industries like law and consulting. 

Reference:

  1. Mid-year RIA M&A Market Report: Winners, Losers And Trends, July 16, 2024.