It’s an exciting time to be in the financial services industry. We are at the crossroads of supply and demand imbalance, demographic shifts and technological leaps that all put pressure on RIAs to perform at their very best – or get left in the dust. Consider:
- The number of RIAs in the US has risen to its largest number ever, 15,396, according to the Investment Adviser Association (IAA).
- At the same time, nearly 40% of advisors plan to retire in the next decade, according to Cerulli Associates – far more than plan to enter the industry.
- Demand for investment advisors is up, with a record high of 56.7 million clients in 2023 (a 4.4% increase), more than 90% of them individuals, says the IAAs Investment Advisory Industry Snapshot
- Mergers and acquisition activity is up in the first half of the year by 5% over last year, says DeVoe & Company.
- Finally, the greatest growth is happening in the largest RIAs, also documented in the IAA Industry Snapshot
Those are a lot of different data points, but they paint a picture that suggests we are seeing more demand for advisory services with fewer advisors to serve it; more of those advisors are independent RIAs; and some of those RIAs are turning to M&As as a way to grow.
I joined TIFIN AG because I see an opportunity to help support and shape this dynamic industry. I have spent years of my career on the advisory and brokerage side of the business, so I understand the needs and pressures facing RIAs. In my new role, I help these same firms use AI to drive growth.
The Difference AI Can Make in Mergers & Acquisitions
AI, specifically supervised AI, is already showing how it can play a role in organic growth. Supervised AI, not to be mistaken with generative AI solutions, are tools that excel when it comes to crunching lots of data and finding unexpected patterns, allowing RIAs to focus their precious time and resources on the opportunities with the highest chance of success.
Those same capabilities can be deployed to provide crucial insight during mergers and acquisitions. AI can spot opportunity and reduce risk – ideally long before a deal closes.
- Improve Accuracy of Valuation: By studying data from multiple sources tied to the firm’s offerings, AI can help identify clients most likely to align with services such as tax planning, charitable giving, comprehensive estate planning, private market investments and insurance. Using AI to render hyper-personalized engagement plans for each acquired client before the deal closes can help the acquirer better understand the incremental revenue potential and related valuation.
- Identify, Quantify and Address Attrition Risk: Know what you are buying before you consummate the deal. By studying client behaviors based on the data a firm can obtain during diligence, supervised AI tools can use third party data on those same investors to predict the propensity for a client to be at risk of leaving the advisor. The range of data to render such insights typically includes analyzing the past 12 months of cash flows, open and closed accounts activity and the type of accounts within a client household. This forms a more complete picture of each client to predict a client’s prosperity to leave the firm. These insights can help the acquiring firm understand the hidden attrition risks that may be lurking within the verifiable AUM reported during diligence.
- Prioritize Existing Leads Pipeline: Commercially available AI tools have the ability to intake existing leads from both parties and enrich them with third party data to provide the firm with more precise insights for each prospect. Has a prospect gone through a life event, changed a job, donated to charity, sold a business, or received equity in a privately held company? These are just a few of the types of enriched data insights that AI can provide and then translate into a prioritized list of leads for the new combined firm to pinpoint the potential for new clients over the next 3, 6 or 12 months after the deal closes.
- Expand Share of Wallet with Combined Services: Sometimes a deal is worth more than the sum of its parts. If each firm has unique strengths, the combined client pool might present an opportunity to capture a greater share of wallet. Again AI comes to the rescue by studying the combined firm’s ideal client profile, analyzing current assets and cash flows, looking at money-in-motion events and demographic data for each client to predict held away assets ripe for consolidation. AI does the heavy lifting across the entire client base with speed and precision, looking for areas where the combined firm can serve clients more completely than the merging firms did individually. The result: a much clearer picture of the held-away asset gathering potential, prioritized client by client, to predict net new assets that could be gained over the next several months.
Start Early to Maximize The Advantage for Both Sides
The best piece of advice I could give to firms looking to merge or participate in a sale is that they should leverage AI not during a merger or acquisition, but well before. Sellers should be taking advantage of AI’s ability to enhance organic growth to maximize assets under management and therefore valuation. Buyers who have AI tools in place can use it both to help evaluate the potential of a purchase, but to maximize the value they get from their newly expanded clientele.
Navigating the next few years as an RIA is going to take nerve, opportunism, and investment. With AI helping read the tea leaves and point the way towards profitability, I am confident many of these new RIAs entering the market today can seize the opportunities presented by both organic growth and M&A activity to become the advisory leaders of tomorrow.
If you want to learn more about TIFIN AG and how we can help you drive asset growth, schedule a meeting with me by clicking this link.