There are two approaches to build scale, improve earnings performance and competitive positioning for independent retail investment firms: An external strategy based on mergers and acquisitions (M&A), and a strategy based on internal growth. Many investment dealers have leaned toward the external strategy, which builds critical mass faster. However, the recent transformation of the wealth-management business offer new ways of structuring the business that present the potential to expand operations organically and more rapidly.
From 2005-15, firms were active in acquiring businesses and advisors to expand their business reach. The typical approach was to identify likely target firms based on price and compatibility with the existing business model. With efficient cost-management, integration of the independent businesses can improve earnings and performance. The cumulative result? One and one equals more than two.
But the transforming wealth-management business offers a robust second option for independent retail firms to expand their client base and engagement. Specifically, this approach involves the use of a sophisticated, modern platform that adapts innovative technology, offers a more complex array of products and services, and changes advisors’ practices. Success, using this approach depends critically on crystallizing the vision to project the firm’s wealth-management value proposition.
In the past, the starting point for firms interested in an M&A option was an agreed-upon price based on revenue or client assets under management. Once a deal was done, the strategic priorities were focused on the back office, aimed at smooth cost-effective integration of the businesses. This involved: shifting to a single operating system; establishing a satisfactory revenue payout ratio for advisors that balances the allocation of operating costs and compliance/cyber risks between advisors and owner-shareholders — with payout ratios dropping from the traditional 50% threshold if advisors don’t absorb underlying costs, or rising if advisors take on their share of costs; issuing stock to advisors to incentivize them and better align their interests with owner-shareholders; and forging a uniform culture across the advisor network. High-profile examples of success among the independents include Wellington West Capital Inc., Desjardins Group, Richardson GMP Ltd., and Industrial Alliance Securities Inc., among others.
However, designing the right wealth-management strategy for internal operations can achieve a similar objective of expansion and scale. The strategic vision should take into consideration these features: the digitalization of the wealth-management platform to facilitate client communication, notably through mobile, by allowing access to information, financial accounts and portfolio performance to enable greater client engagement and to reach out cost-effectively online to new clients — particularly investors with relatively small portfolios, such as those in the mass affluent market.
This wealth-management platform should provide key tools, such as financial, estate and tax planning services as well as a robo-advisor option. It should offer an expanded shelf of financial products, including diversified alternative investments, such as private equity and hedge funds. This would give independent firms the potential to differentiate their businesses and attract sophisticated high net-worth clients. Robo-advisor platforms should offer a hybrid client/advisor investing option for existing clients, enabling the on-boarding of smaller investors through reduced costs. Furthermore, the wealth-management platform should promote a deeper interactive client/advisor relationship anchored in a financial plan and employ technology for administrative tasks, which would give advisors more time to deal with their clients’ unique needs. Finally, online access to products and services should be integrated closely with direct access to the advisor.
Perhaps the greatest benefit of this approach flows to advisors as it would give them greater potential to grow their businesses through access to more products, services and tools to carry out their professional responsibilities. The traditional approach focuses on cost-effective integration of the acquisition, benefiting the owner-shareholders. A strategic approach centred on attracting quality advisors and their books of business carries a higher priority at a time when the availability of acquisition candidates from the mid-sized dealer pool has diminished rapidly.
The optimal approach should focus on both strategies: try to find the right acquisition candidate and integrate it cost-effectively within the firm while, at the same time, develop and implement a comprehensive strategic plan to build the wealth-management business with existing and new clients as well as draw the interest of new advisors and their clients to the firm.