Did you hear a tornado alarm in May? That might have been the sound of Goldman Sachs invading your industry.
The investment bank’s purchase of United Capital for $750 million has likely changed the game in a space already giddy with M&A activity. The consolidation in the RIA world is happening at a rapid pace and shows no signs of stopping—it’s happening for a number of reasons, not only financial ones, but amid a backdrop of demographic trends that cut to the heart of the U.S. economy.
As the baby boom generation joins the AARP crowd, the advisory industry does so apace: People are retiring and wanting to turn their assets over—to people who are also retiring. Who is going to get that money? Goldman, a white-shoe firm catering to the ultra-wealthy, obviously saw a good thing in United Capital, a firm known for its intense national branding, Jenny Craig-like holistic card systems and access to people at the lower end of the wealth rainbow. “Access” was a key word in Goldman’s press releases heralding the purchase at an estimated 18 times cash flow.
Because the market is good, advisors are likely thinking the best deals for their firms are to be found now. The demographic changes are also putting clients in play.
“We have had clients who’ve come from firms where the advisors were the same age as them,” says Jason Ozur of Lido Advisors in Los Angeles. “What they didn’t want was a situation where they were 75 and their advisor was 75 years old.” Because sellers likely have high expectations, he says, buyers have to look at the composition of the portfolios they’re getting. “How did they do in the fourth quarter of last year? The markets were down 14% or 15%, and the portfolio being managed by the company we’re going to acquire is down 12%. Do those clients fit in with the way we manage money?”
Parties always end. The bull market will stop too. 2018 offered another glimpse of somber times after trade disputes and uncertain Fed moves sent cold shivers through the markets. The S&P 500 caught the cold, tumbling 13%-14% in the fourth quarter, and 6.59% for the year (with dividends included, it was a negative 4.75%). “The challenge everybody has in the space when the market’s down is that the revenue is down at the same time the workload is up,” says Scott Hanson, co-founder of Allworth Financial in Sacramento, Calif.