Optima Blog

The Bigger the Better

When talking about RIA M&A activity, it appears that bigger really is better. According to The Echelon 2020 RIA M&A Deal Report, larger RIAs continue to be the most coveted by professional buyers as $1B+ RIA acquisitions helped buoy the continued torrid pace of RIA deal activity in 2020.

More record setting
According to Echelon, 205 deals occurred in 2020, a modest 1% increase in deal activity over 2019, and another record for annual RIA transaction volume. In addition, Q4 2020 set the record for deal volume in a single quarter with 69 transactions – a 25% increase over Q3 2020.

Larger deals lead the way
Leading the way were acquisitions of firms that had more than $1B in AUM. According to Echelon, 78 acquisitions, or 28% of deals in 2020 have over $1B AUM, with the average AUM of sellers coming in at $1.8B. 

Flight to quality
It should come as no surprise that RIA transaction volume continued to flourish in 2020, as more and more well-capitalized buyers enter the M&A arena. Interestingly, the number of larger transactions may indicate a preference for “quality” by the buyers. Professional buyers are increasingly looking for well-established firms who have developed sophisticated operations, processes and technologies with steady revenue streams – capabilities that are often lacking in sub-$1B AUM firms. 

What larger firms may lack, however, are formalized growth engines – including professional business development expertise combined with sophisticated digital marketing platforms – that can help them grow beyond the $1B AUM plateau. Professional buyers who possess these capabilities may be strong matches for relatively mature sellers, potentially portending the sustained strength of RIA M&A activity in 2021.

When the Game(stop) is afoot

It’s been difficult to miss the media coverage of the GameStop/Reddit/Robinhood drama, which has enthralled individuals of all ages, from elementary school to octogenarian. Regardless of which side you (and your clients) are on, this phenomenon represents an opportunity to engage proactively with investors on a variety of levels. 

What’s going on?
Is it really David versus Goliath? Has David become Goliath? Your clients may wonder whether this is a temporary occurrence or has long-term implications. And, of course, the overriding concern they probably have is whether it is “good” or “bad” for the markets and should they be doing something. As their financial advisor, you can provide direction, lay out the facts in a neutral manner, and reinforce the benefits of following a plan tailored to their needs and circumstances, not chasing trends or the market.

Talk about it.
The events also lend themselves to a discussion on the connection between risk and the potential for significant reward, but also significant loss. A little knowledge about investment strategies, risks, gains and losses drawn from awareness and interest in GameStop can provide a foundation for more substantive and thoughtful discussions between investors and wealth managers. Through these discussions, wealth managers can also reinforce the value of their advice and the depth of their expertise. 

Put it in perspective.
This is not the first time events similar to this have happened, but the rapid dissemination of information and, sometimes, misinformation, today magnifies the impact and is an indication of the rising involvement of the public in investing and the proliferation of investment-related information available from a widening range of sources. Putting the situation in perspective by citing previous incidents and their outcomes can provide context and a foundation for the sound advice and guidance provided by a financial advisor.   

Exactly how the GameStop story will play out remains to be seen. In the meantime, showing your clients that you are monitoring the situation, thinking strategically, and actively engaging with them is a scenario we believe is likely to have a positive outcome.

ETFs on the Fringe

This week, Horizons ETFs Management Inc., a Canada-based provider of ETF solutions, launched the world’s first ETF focused on the emerging psychedelics market. The ETF is traded on the NEO stock exchange and tracks the North American Psychedelic Stock Index, which comprises 17 North American life science and pharmaceutical companies.

Growth of thematic ETFs
Horizons is hoping to piggyback off their introduction of the world’s first cannabis-focused ETF in 2017. Both psychedelics and cannabis represent just a portion of the “thematic” ETF categories that are now available to investors. Others include opportunities to invest in the burgeoning space economy, companies that appeal to millennials, the Internet of Things, robotics and the genomic revolution, to name a few. This availability indicates a growing trend among ETF providers to expand their offerings into more and more “micro” segments or themes as they continue to launch increasing numbers of ETFs even amid less than promising market trends. As the charts below show, while 2020 saw a record number of ETF launches, there was also a record number of ETF closures, either by delisting or liquidation—a trend that did not spare even the most prominent ETF providers.

Source: ETF.com

Furthermore, data from September 2020 shows new ETF products launched in 2020 garnered fewer assets than ETF introductions in past years.

Still, even amid massive numbers of closures within the $5 trillion ETF market, and a failure to attract significant inflows to new ETF products, ETF providers were not fazed. We expect this trend to continue as ETF providers look to launch even more products—including newer and more esoteric theme-based ETFs—to respond to market demand and ultimately give more choice to investors.

Color Matters

There has been a lot written regarding the color purple, worn in several different shades by Hillary Clinton, Michelle Obama and Kamala Harris. One of the most discussed theories is that Democrat blue and Republican red together make purple. This is a wonderful idea suggesting unity and collaboration.  

Apparently, Vice President Harris often wears the color purple to honor Shirley Chisholm, who was the first Black woman elected to the U.S. Congress and the first Black candidate for a major party’s presidential nomination. But one does have to wonder if Harris, Obama and Clinton all got on a Zoom call and agreed on which shade of purple they would wear. Wouldn’t it be great if they did, knowing that there is meaning and pre-conceived notions of what colors represent. Whether it be fashion, packaging, branding or marketing, color really does matter.

Some of the psychological associations with the colors worn at the Inauguration are:

And last but not least:

A Note on Creative Messaging

Have you been to a museum lately? Probably not! But don’t worry, classic paintings like Girl with a Pearl Earring by Vermeer still hang safely there. In late 2019 and through 2020, Invesco launched a “Times Change” campaign that may have confused some who are worried about the Girl’s pearl earring because in the ad it was replaced with an Apple Airpod.

The campaign showcases a series of replicated Old Master paintings to support the tagline “Times Change.” Invesco’s advertising agency, LIDA, commissioned each panting and conceived it to align with different Invesco investment solutions. For example, LIDA added modern windmills to Gainsborough’s Mr. and Mrs. Andrews to highlight Invesco’s ESG offerings. The alignment of old and new worked well with the tagline, while at the same time conveying Invesco’s heritage alongside its ability to offer something new. The campaign included both print and digital and ran throughout Europe.

In its recent Global 100 2020 ranking of the world’s largest asset managers in integrated marketing communications, Peregrine Communications used Invesco as a case study, saying: “…the campaign saw a dramatic increase in brand engagement, with branding growing by 32.5% in the week after the campaign launched. The fact that the campaign was able to generate the peak brand awareness in the last 12 months demonstrates the ability of well-thought out creative and messaging to engage institutional and retail audiences alike.”

Effectively marketing financial services, including wealth and asset management, is challenging. It takes creativity, an understanding of the financial services industry and the goals of its core target markets, to execute successfully. We congratulate LIDA on this innovative concept and always celebrate the ability of great creative to make a difference.

Advertisement images are from LIDA, part of M&C Saachi Group.

The Power of Testimonials

The internet has made information sharing easy, and we’ve become a society of reviewers. We check to see what others have to say before making even the smallest of decisions, whether we’re selecting an Uber driver, a wine to purchase or a show to binge watch.

If you’re a financial advisor interested in expanding your client base, it’s important to understand the power of a positive review. Investors want to work with professionals they can trust, especially when it comes to their money, and testimonials are a way to persuade prospects and build confidence. Now that the SEC has modernized its marketing rules to allow testimonials in advertising (with certain limitations and disclosures), it may be time to learn more about creating them.

Why they work
Advertising typically takes the “trust me, I’m great and here’s why” approach. You may be convincing, but hearing that message from an unbiased client is much more credible and authentic, especially when that client is relatable.

What should be included
Every testimonial should indicate how you solved a problem or provided a specific benefit. Examples should vary and hit upon the key needs your target market faces.

Factors to consider
Prospects want to know that you have experience and success helping others like them, so cases should be representative of different demographics and financial needs. As with any form of advertising, messaging should align with your value proposition and mission.

Where they should be used
Client stories can be used across your marketing content to help you build trust, including your website, email marketing, brochures or hand-outs. Photos and videos can make testimonials even more compelling and impactful.

How to get them
Your clients may be willing to share their stories and sing your praises — sometimes all you need to do is ask. However, before you publish anything, make sure you’ve secured their permission and that you’re following the SEC’s revised guidelines.

The Evolution of the Family Office

Say the words family office or family office services, and for many in the industry, images of bill payment, tax preparation, comprehensive reporting, and other detailed administrative financial tasks come to mind. While these services are still an integral part of what a family office does for its clients, the modern family office is evolving to meet the needs of contemporary life.  

Family office 1.0
The origins of family offices in some form go back centuries but were “popularized” in the U.S. by families such as the Rockefellers and the Morgans. They were predicated on providing investment management, governance, and administrative services. In addition, some family offices provide concierge services including facilitating travel plans, property management, and other “luxury” activities. Typically, these “behind the scenes” duties are designed to make a family’s life easier.

The modern family office
The complexity of managing and maintaining multi-generational wealth has grown, and family offices are adapting to meet the new reality. On the investment side, family offices are honing their expertise and access to private investment opportunities, “increasingly investing in both young and established private companies,” according to a December 2020 article in Forbes. Family offices can make decisions relatively quickly and deploy significant amounts of capital, putting them on the same level as some institutional investors. Family offices founded by first-generation sophisticated entrepreneurs are accustomed to deal-making and are more aggressive in investing, with the goal of significant wealth generation. 

Going beyond investments
Firms are going far beyond both investments and traditional family office services. Another article in Forbes details how family offices are trying to be a single source for UHNW families. Martin Graham, Chairman of Oracle Capital Group in the U.K., provides, among other things, “help with immigration, finding a property to live in, getting children into school, setting up charitable foundations, or project finance.” Other firms are adding services that apply to today’s world. Firms such as Rockefeller Capital Management, for example, stress their expertise in working with families on family legacy, governance, and next-gen education, helping families focus on strategies that span multiple generations. Many family offices also offer concierge services designed to enhance their clients’ lifestyle, such as exclusive access to experiences, curated products and services, and recommendations to vetted partners. Other services include cybersecurity protection and VIP healthcare services, particularly relevant in the current environment. 

Most family offices have realized that basic family administrative services are table stakes commodities that can be obtained from many sources. In order to truly stand out and add value to their clients’ lives, they are elevating the family office offer to a differentiated and exclusive level.

The Consolidation Drive Continues

As we return to work in the new year, we are greeted with the news that serial aggregator Hightower has completed its largest acquisition to date. The private equity backed firm purchased the UHNW-focused, $8B Bel Air Investment Advisors from Fiera Capital. Hightower has been on an M&A roll, having completed some 14 acquisitions since 2019. This pace is likely to continue as the firm’s growth strategy was recently refueled with a $700-$800MM capital raise from Goldman Sachs, Neuberger Berman and Coller Capital. 

This auspicious start to 2021 marks a continuation of the record pace of RIA acquisitions in the closing quarters of 2020. In response to COVID-19, acquisition activity in the RIA market tanked in 2Q20. But as the financial markets rebounded, so did the longer-term consolidation trend. By the end of the year, annual RIA transactions hit a new record, as the chart from Echelon Partners below shows.

Source: Echelon Partners

Transactions in 2020 were dominated by roll-up firms, such as CI Financial, Hightower, Creative Planning, Mercer and Focus Financial. Together these five firms accounted for 39 deals. The average AUM per transaction also rose in the year to $1.8B, up 24% from 2019.

It’s likely that the consolidation wave will continue through 2021. The favorable demographics have not changed nor has the drive for scale efficiencies and brand dominance. It also seems to be the consensus that financial markets will remain relatively supportive of the wealth management business as the new year progresses, vaccines become more widely available and a return to “normality” approaches. 

An Economic Booster?

With the rollout of the first COVID-19 vaccine, many people are finally feeling more optimistic. While widespread distribution of the vaccine will take some time, the initial rollout is an important first step in stemming the pandemic.

Health Benefits
According to a recent paper by Charlene M.C. Rodrigues and Stanley A. Plotkin titled Impact of Vaccines; Health, Economic and Social Perspectives, the numerous benefits of vaccine rollouts are difficult to overstate. The vaccine is expected to play a significant role in reducing COVID-19-related mortality rates. Provided there is sufficient vaccine acceptance, there is also hope for the development of herd immunity which can greatly reduce the spread of the virus, particularly to the unvaccinated, who may be too young, too vulnerable, or too immunosuppressed to receive the vaccine.

Economic and Investment Benefits
Additional benefits to widespread vaccine rollout may help boost the U.S. economy. According to FundFire, a recent research study by Bank of America revealed that investor optimism has “skyrocketed” this month following news that the Pfizer and Moderna vaccines had proven effective in clinical trials. According to BofA Securities, many fund managers are increasing allocations to equities and commodities and decreasing cash holdings as a result of the vaccine news – representing the first time they are underweight cash since May 2013.

While it remains to be seen how big an impact the vaccines will have on the overall economy, the reduction in healthcare costs and increase in productivity from a healthier workforce will certainly move the economy in the right direction. Sectors and companies that are directly and indirectly related to the manufacturing and distribution of vaccines are attracting significant investor interest. Overall, it appears investors may be recognizing broader benefits as well. Advisors should leverage this opportunity to communicate with their clients and provide guidance on whether these represent short-term tactical events or longer-term strategic changes to the investment landscape.

Can We Have a Word…or Two or Three?

As we finally near the end of 2020 and look forward to 2021, a vocabulary check gives clarity to what is on everyone’s minds. Several dictionaries have announced their words of the year, and there are few surprises.

Both Dictionary.com and Merriam-Webster’s word of the year (WOTY) is pandemic, “based upon a statistical analysis of words that are looked up in extremely high numbers in our online dictionary while also showing a significant year-over-year increase in traffic,” according to Merriam-Webster. Merriam-Webster saw the first big leap in searches, an increase of 1,621% over the previous year, for “pandemic” on February 3rd, when the first COVID-19 patient in the U.S. was released from the hospital. Lookups continued to surge and by March, searches were up an average of 4,000% over 2019. While other terms, such as “coronavirus” and “COVID-19” had dramatic increases then waned, “pandemic” has maintained its “popularity.”

Taking a different tack, The Oxford English Dictionary (Oxford) was unable to declare a single WOTY for 2020, since “It quickly became apparent that 2020 is not a year that could be neatly accommodated in a single ‘word of the year.’” Instead it issued a report, “Words of an Unprecedented Year” that explores “the hyper-speed at which the English-speaking world amassed a new collective vocabulary relating to the coronavirus, and how quickly it became, in many instances, a core part of the language.” Oxford also highlighted key words that rose to “prominence” in certain months, such as “bushfire” in January, when the terrible Australian fire season occurred, “COVID-19, lockdown, social distancing, and reopening,” all of which took off beginning in March, and “Black Lives Matter, cancel culture and BIPOC” starting in June. It is fascinating that many are either new or recently introduced words or words that are being used in a completely new context, such as “mail-in,” which saw a jump of 3,000% in usage versus 2019.

Finishing our WOTY tour, Collins Dictionary selected “lockdown” as its word of the year because “it is a unifying experience for billions of people across the world.” The dictionary saw over 250,000 uses of lockdown, defined as “the imposition of stringent restrictions on travel, social interactions, and access to public spaces,” in 2020 versus 4,000 in 2019. Other words on the Collins Dictionary short list include “coronavirus, BLM, key worker, furlough, self isolate, social distancing, and, on a lighter note, Megxit, TikToker, and Mukbang.

Words are powerful tools, helping us define both the topical and the enduring. They have the power to help us build community and experience events from a common foundation, as well as leave a record for the future.