The Value of Wealth Management will hold firm to the other side of the pandemic, says Forbes

As the world adjusts to the new normal dictated by social distancing and domestic quarantine, senior executives in the world of wealth management have shared their concerns and perspectives on the wealth management industry.

According to the article by Forbes, written by Mark Bruno, Managing Director at ECHELON Partners, the major topic of conversation was the potential for the current market conditions to influence merger and acquisition activity in the wealth management industry.

Following a discussion amongst the executives, a major question raised was that of valuations.

‘Coming off of a record year for M&A in 2019 – the seventh straight year that activity levels hit at an all-time high – a clear psychological and emotional concern had emerged. Would the COVID-19 crisis cause M&A activity to come to a halt and force deal values to plummet?’

‘The velocity of change has a way of shaping the reality left in its wake. It was clear that even leaders from some of the most successful businesses in financial services industry needed to hear an important reminder,’ writes Bruno under the heading of cognitive dissonance.

Bruno quotes Dan Seivert, Founder and CEO, ECHELON Partners, who said: “Emotionally, you are in one place. Cognitively you need to be in another.”

‘Here’s the truth about valuations in the wealth management industry now,’ writes Bruno. ‘While equity markets experienced a historic decline in the first quarter, it was one chapter in a story that has much more depth and a number of more important defining characteristics.’

‘There are two critical considerations – let’s call them the Two Truths – that carry much more weight than the 20% drop in the S&P 500 during the first quarter.’

First – ‘Most wealth management firms are managing diversified portfolios for their clients, and equity exposure could account for just 60% the assets they manage, with fixed income and alternative investments making up the balance.’

And secondly – ‘When a firm is acquired, a rolling four-quarter period leading up to a deal’s close is commonly used to analyse and assess a firm’s financials.’

‘Combine these Two Truths and a more balanced view of reality emerges: On a rolling four-quarter basis through March 31, the S&P 500 declined 2.1%. The Bloomberg Barclays U.S. Aggregate Bond Index was up 2.2% across the same rolling period.’

‘Applying these returns to a balanced portfolio of 60% equities and 40% bonds: The decline during a rolling four-quarter period at the end of March was a nominal 0.7%. To be clear, wealth managers, whose revenues are largely based on fees charged to clients for the assets they manage, will take a financial hit during the first quarter, without question.’

‘But the overall value of their businesses will be significantly less impaired on a relative basis.’

The bottom line, says Bruno, is as follows:

‘A track record of established growth and recurring revenue streams, coupled with an expanding universe of professional buyers and funding sources, will continue to drive strong deal values in the wealth management industry. Equity markets have also surged since the close of the first quarter, with the S&P 500 up nearly 15% through May 5, and some of the revenue declines from the first quarter could be offset if markets remain relatively stable.’

‘Will 2020 be yet another record year for M&A activity and deal values in the wealth management industry? While it is too soon to tell right now, activity remains strong and many deals continue to close and progress. We are gaining more information every day about the future of our economy and the impact it will have on the wealth management industry.’

‘And that is precisely why I started this blog: To give you an inside – and an honest – point of view into the rapidly changing world of wealth management. These are unprecedented times and I’m privileged to have the opportunity to regularly share information and observations about the evolution of this industry.’

CLICK HERE to view the article by Bruno, or CLICK HERE to connect to him on LinkedIn.