Page 19 - Investment Advisor March 2022

employees and advance the firm’s To attract and retain top talent, RIA benefits can be used to directly impact
goals,” the report said. At the median firms can “ensure they have a com- employee satisfaction, support develop-
firms, one in three staff members are pelling compensation strategy and a ment, and incentivize staff with long-
equity owners. well-defined employee value proposi- term opportunities.”
“A firm’s compensation strategy, tion to help differentiate them in a Such benefits include workplace
especially incentives, can help drive competitive labor market,” according flexibility to support work-life balance
overall firm goals when aligned with the to Schwab. which, amid the pandemic, “prospective
firm’s strategic plan,” the report said. Providing various benefits is a crucial and current employees are seeking,” the
“Firms using performance-based incen- part of a firm’s offer to talent but “tra- report said.
tive pay more often have documented ditional benefits like health and dental Schwab’s poll for the 2022 RIA
foundational elements and see stronger insurance are typically considered table Benchmarking Study is now open,
long-term results.” stakes,” the report said. “Non-traditional it said.

4 Big Reasons RIA Deals Are Surging

IA merger and acquisition activ- The RIA Deal Book focuses mainly transactions surpassed the previous
ity skyrocketed in 2021, setting a on the acquisitions and mergers of what record of 65 set in the third quarter.
R record for the eighth consecutive DeVoe & Co. considers “true” RIAs, and
year, DeVoe & Co. reported in January. limits its tracking to RIAs with upward 3. BENEFITS OF SCALE.
With 242 transactions posted, 2021 of $100 million to optimize the statisti- Over the last four years, advisors have
volume was 52% higher than in 2020, cal accuracy of their reporting. Analysts increasingly been attracted to the ben-
according to DeVoe’s RIA Deal Book. screen out SEC-registered hedge funds, efits of scale, joining larger organizations
All seller sizes increased their activ- IBDs, mutual fund companies and other to gain access to broader service capa-
ity in 2021, but the big story last year companies that do not operate as tradi- bilities and eliminate administrative bur-
was the doubling of midsize sellers as tional RIA firms. dens. Many of today’s buyers — mainly
volume of sales by firms with between Regardless of how near-term trends private equity-backed consolidators with
$500 million and $1 billion in assets and drivers affect 2022, RIA M&A will sophisticated management teams — have
under management. The category continue its upward trajectory for the carefully designed processes that can
added 6 percentage points to comprise next seven or more years, the report expand the profitability and accelerate
23% of transactions. said. Here are four reasons for the cur- the growth of acquired firms. An acquirer
The prominence of midsize and larg- rent surge: with a profit-increasing, growth-driving
er sellers drove the average assets of machine can pay more for firms that will
selling firms to a record high of $1.1 1. THE LIFE-AND-DEATH REALITY benefit from these capabilities.
billion — excluding sellers with more OF COVID.
than $5 billion in assets to eliminate the The coronavirus has spurred many 4. HIGH VALUATIONS.
effect of outliers. In aggregate, the total advisors to examine their succession RIA valuations have steadily climbed in
assets transacted also reached a peak, plans — or lack of one. A good number the past decade, and now exceed those
ending the year at nearly $600 billion. decided that an external sale was a of 2008. Even so, some 40% of advisors
On the buyer side, consolidators were partial or full solution. The result? So expect valuation to increase in 2022. One
dominant in 2021, executing 53% of all many sellers signed on the dotted line effect of these high valuations is that
transactions, up 10 points from the pre- that the volume stretched the capacity next-generation advisors are increasingly
vious year. According to the report, this of buyers. unable to afford to buy their founders out.
momentum is the result of larger and Only 38% of advisors are confident that
more productive consolidator M&A and 2. LOOMING TAX CHANGES. the next generation can buy out current
integration teams. Another accelerant is Potential forthcoming tax changes pro- owners. The alternative for those who are
the proliferation of new entrants, often pelled advisors already headed toward uncertain? Selling externally will be best
acquisitive RIAs that have shifted to the “sell zone” to close deals before for some firms, while selling minority
become consolidators. year-end 2021. The 76 fourth-quarter stakes will be better for others.

MARCH 2022 INVESTMENT ADVISOR 17