When Investment Advisors Merge

by charles | Comments are closed


All growth is not created equal McKinsey & Company

It’s never been easier to start a wealth management advisory business and never been harder to grow it. Very few investment advisors achieve national size and status without a product or technology edge.

Of the approximately three thousand RIAs and OCIOs in the US, only about eighty have managed to accumulate over five billion in AUM.

According to the Investment Adviser Industry’s snapshot 2022, “most investment advisers (88.1%) are small businesses with 50 or fewer employees and one or two offices.”

These small advisors, from $100 million to $5 billion AUM, grew at a compound rate of about 6% over the four-year period from 2017 to 2021. The largest advisors on the other hand, those over $100 billion AUM, grew more than twice as fast, 14.9% over the same four years.”

Concentration creates another roadblock. As we noted in our last Outsourced Chief Investment Officer (OCIO) report, just eight providers out of the one hundred seven we listed – Aon, Blackrock, Goldman Sachs, Mercer, Russell, SEI, State Street, and Willis Towers Watson – manage well over half the OCIO assets, $2.073 trillion of the $3.74 trillion AUM.

So how do you build “the next great investment institution” as Jon Hirtle, executive chairman of Hirtle Callaghan describes the challenge? Why are there so few breakthrough OCIOs?

Barring a rare exception, there are only three ways most wealth and institutional money managers grow — buy, sell, or merge.

Those that finally opt for better-resourced allies are in good company. Echelon Partners 2022 RIA M&A Deal Report tracked 340 announced transactions in 2022 alone, the tenth straight year of record acquisitions.

The problem is, most mergers and acquisitions crash and burn. Roger L. Martin, former dean of the Rotman School of Management at University of Toronto, noted in a Harvard Business School article that 70% to 90% of all acquisitions are “abysmal failures.”

Why? “Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”

Professor Martin offers four suggestions to improve M&A outcomes.

  • Be a smarter provider of growth capital.
  • Provide better managerial oversight.
  • Transfer valuable skills to the acquisition.
  • Share valuable capabilities with the acquisition.

But if the dream is to build an enduring investment powerhouse, you had better pick the right partners.

Mr. Hirtle cautioned in a recent Financial Advisor interview that “a lot of acquirers are ‘financial consolidators’ who will be ready to sell again in three to five years after making an acquisition. Clients and staff do not want to deal with that kind of disruption a second time, so it is important to join with a stable firm who values you as a long term partner.”

What do you guys really want?

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Know what you own, and know why you own it — Peter Lynch

These are “interesting times” for institutional investors.  Covid and a market crash in 2020, stimulus frenzy and valuation-highs in 2021, war and the end of free money in 2022. Whew.

But despite the volatility, there’s nothing like a decade’s long bull market to fatten school coffers.  Just about every endowment on balance is better off than it was a decade ago, as our ten-year return numbers show.

NACUBO and TIAA will have more to say on the matter in their online session this Thursday February 23rd at 2-3:30 ET as they showcase their annual semi-official endowment league tables.

We recruit chief investment officers and finance professionals for families and institutions, so our 2022 endowment performance tables focus on the individuals who manage the money.

Endowment investment heads are the ultimate long-term, strategic investors.  They have an infinite investment horizon, a global playing field, and can invest in anything anywhere – within the broad policy limits set by their institution.  Their performance is a bellwether for what’s prudent and possible.

We don’t mean to slight the thousands of bright, creative, and top-performing investment professionals at foundations, family offices, and Wall Street firms, but it’s difficult to extract meaningful data on compensation or performance from opaque sources.  So, we go with what we can get.

In this report, we feature ten-year fiscal year-end 2022 investment returns for one hundred twenty-eight US and six Canadian institutions — the latest available.

We consider a ten-year span to be a rigorous and revealing measure of the strength of an institution’s oversight and long-term investment abilities, but we remind our readers that there’s much more to the story.

First the caveats

Keep in mind that the job of every CIO and investment staffer is to meet the objectives set by their board, not to beat Yale.

Every school has its own endowment payout rate and tolerance for risk and that’s what CIOs aim for.  Some schools rely heavily on income, others place more weight on growing the principal.

We all love the league tables (well, most of us) but board members and administrators set the parameters for investment execution, and they are the ones to judge whether their goals are met.

Next. There is no one reporting standard for endowment performance and no institutional body to enforce a standard even if there was one.

Many schools report their numbers net of all costs including external management fees, internal office costs, and the endowment tax, but not all.  Some report gross returns.  Others subtract external management fees but not office costs or the endowment tax.  Over a ten-year period that makes a difference.


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