Mergers and Acquisitions: Good (or Bad) Technology is the Key Factor in RIA Valuation

Jan 12, 2022

Time to start making room at the deal table for the CTOs. RIA firm’s technology platforms now have the most impact on their valuation and attractiveness to new advisors.

For the last few years we’ve watched a tsunami of wealth management M&A activity that shows no sign of abating. The reasons are many: 

  • Cash is cheap. 
  • The RIA sector is hot with investors. 
  • Huge demographic swings and wealth transfers underway. 
  • Big firms getting bigger by gobbling up smaller ones. 
  • Owners/founders ready to retire or no longer want to fight for growth with the operations and technology investments they need to survive. 
  • Private equity firms coming in from outside of the industry hunting for strong investments.

Ultimately it resulted in another record year of M&A activity with 2021 deals surpassing all 2020 activity in just three quarters (In November, Janet Leveaux reported in ThinkAdvisor, that M&A activity in the RIA space reached 165 deals in the first three quarters of 2021, passing 2020′s full-year activity of 159 transactions.) On average, that’s a deal every day and a half!  

But what appears to have changed in 2021 is a new and critical driver to the valuations of these deals: technology.  

Where Technology Fits Into the Valuation

While buyers continue to focus on profitability, growth, EIBTA, expense ratios and detailed financials, there is a new and less-calculable aspect to many of these deals. Beyond the numbers on paper, they think about a firm’s potential to grow and scale. A modern and scalable technology platform is the number one asset that will take any firm to the next level—possibly as important as the quality of the leadership team, market presence and conversion rates. The quality of a wealth firm’s technology will tell buyers how operationally automated a combined company could be from day one (or how much they might have to invest to make it competitive).

Technology is important to advisors who want to monetize their book or even break out of their current firm too. As they evaluate potential suitors, It will tell them how the parent company can streamline their operations and grow their book in a profitable way as well as offer better client experiences. 

And it’s important to private equity investors as well. They evaluate a firm’s technology to determine if it is a platform that is unique and thus worth paying a higher multiple to own. They want to buy an asset that is difficult to replicate and they don’t have to invest a lot of money to bring the firm up to speed.

The 2022 M&A Buzz Word: “The Platform Multiple”

Historically, technology was seen as an expense to reduce, but this sustained high level of M&A activity proves that building out custom technology is actually an investment in an appreciable asset (or at the very least a capital expense that can be depreciated!) The importance placed on technology in M&A deals means advisors need to think ahead and make strategic investments to build their “platform.”

To achieve these higher platform multiples, the advisory platform should be a combination of technology that a competitor cannot easily replicate off the shelf.  It should be uniquely assembled, and ideally, has defensible and proprietary technology intellectual property. This totally unique platform will help the firm deliver its value proposition to its clients and must be scalable. 

In short: the platform is a unique and compelling asset that adds value through sales acceleration, increased attractiveness to new advisors and decreased long-term costs as innovation and technology expectations increase. As wealth management firms continue to win on client experience (over complexity of portfolio), a strong platform meets expectations of advisors and clients with a digital, customized experience and a single pane of glass view.

Approaches, costs and roadmaps to get to this level are illusive and hard to predict. Each firm will have its own challenges, costs and method of delivering on it. In general, wealth management firms spending less than three percent of revenues on technology innovation and management are not spending enough to get ahead in this increasingly competitive space. Spending three to six percent of revenues or approximately 15 percent of operating budget are good benchmarks for technology spend in 2022.

Technology has become the deciding factor in today’s deals. Firms on all sides of the M&A table see technology as a critical asset not an expense. It’s an advisor’s key differentiator. The advisors that aren’t investing in it will not grow and will find it challenging to see the highest valuations.

Thinking about selling, buying or investing in a wealth management firm this year? Get in touch and we can help you evaluate the technology in play.

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