Our US correspondent talks to senior wealth management industry figures about what they think are the likely important themes for the sector in 2024, touching on subjects such as the role of private equity in consolidation, and artificial intelligence.

1) Client-facing AI
Tech types trying to illustrate the futility of making predictions about how technology will evolve love to tell the story (perhaps apocryphal) about the introduction of the telephone in the 1870s.

There was a demonstration of the amazing new invention before a stunned audience who couldn’t believe that people could now speak to speak to each other for the first time in human history without being physically together. “And one day,” the presenter (perhaps Professor Bell himself) confidently told the audience, “there will be a telephone in every city.”

Artificial intelligence surely was one of the big stories of 2023. Predictions ranged from AI enabling a utopian future to a dystopian vision of malevolent machines destroying humanity as we know it. Just as no one 20 years ago envisioned that most people in the world would routinely carry around a small device that’s a combination telephone, television and super computer, the evolution of artificial intelligence  will no doubt be just as surprising.

Practical AI applications for the workplace began to hit the market last year. Expect developments to accelerate in 2024 as tools to assist advisors automate and improve interactions with clients proliferate, generating content and facilitating data crunching.

“More client-facing generative AI assistants will go live in 2024, marking the real start of AI’s impact on the industry,” said fintech consultant Grant Easterbrook.

Personalizing client communications
Prospecting and client management will be top priorities for AI developers, according to Siddartha Oza, co-CEO at Sora Finance.

“AI can greatly facilitate lead generation and nurturing,” said Oza. “If done right, AI can step in with effective and automated smart follow-up communications that build trust and establish expertise.”

For client management, AI can craft personalized client communications at scale, Oza said, deepening the relationships with client households. New applications “will also help identify high value and timely calls an advisor can make to build trust and establish expertise,” he added. “Predictive AI can potentially spot when a client could benefit from refinancing a mortgage or when a client might be thinking about moving their account.”

Generative AI apps next year will be able to create “meaningful recommendations and content” advisors can use to grow their business, boost sales and expand relationships, according to Softlab 360 CEO Henry Zelikovsky.

AI apps will help advisors communicate more effectively with current clients and create new proposals for prospective clients, Zelikovsky said. By generating content as if it came entirely from the advisor and continually adding and augmenting content, the AI apps will create “a cycle of customized enhancements,” Zelikovsky predicted.

Data breakthrough
Data cleansing and enrichment will be the biggest AI breakthrough in the near future, said Kendrick Wakeman, co-founder and CEO of WealthTech Strategy Partners. 

“Contrary to popular belief, AI is not as much of a computational exercise as a data exercise,” Wakeman asserted. “This is doubly so in finance, where the data sets are large, not normalized, incredibly messy, and near impossible to clean by hand.”

Financial transactions in New York and London are supported by “a mountain of drudgery in Jersey City and Birmingham,” Wakeman said. “That is a blocking factor and, oddly enough, the only cure is AI, which can help gather, normalize, and enrich data into the sorts of data sets where it can then provide real insights far beyond what we can do now. Once that is solved, all sorts of exciting things can happen.”
 

2) Heavyweights enter minority stakes market
Look for competition among minority investors in RIAs to really heat up in 2024.

Merchant Investment Management, Emigrant Partners, Hightower Advisors, Kudu Investment Management and private equity firm TRIA have dominated the market to date, but they’re about to be challenged by two industry heavyweights with impressive RIA resumés: former United Capital and Goldman Sachs power broker Joe Duran and former Emigrant CEO Karl Heckenberg.

Duran, who sold United Capital Partners to Goldman Sachs in 2019 and subsequently became a Goldman partner, left the Wall Street giant earlier this year to launch Rise Growth Partners, which will begin to take minority stakes in RIAs next year.

Heckenberg, who masterminded the rise of Howard Milstein’s Emigrant Partners as a minority investor powerhouse over the last five years, raised approximately $1 billion to fund a new venture, Constellation Wealth Capital, which will invest between $25 million and $200 million in wealth managers with more than $1 billion in AuM.

Array of services
Heckenberg struck first, acquiring a stake of more than 25 per cent in AlphaCore Wealth Advisory, a California RIA specializing in alternative investments, earlier this month.

In addition to providing capital, Constellation offers RIAs consulting on growth strategies, technology, talent and service and operations. Heckenberg’s advisory team includes industry veterans Lisa Crafford, the former head of business consulting for Pershing who will head advisory services and Greg Lawton, a former Crescent Capital Group executive who will raise capital and seek strategic partnerships for Constellation.

Rising Growth is targeting RIAs with between $1 billion and $5 billion in AUM, according to Duran, who has also assembled a team of experienced executives to help RIAs overcome operational, technical and strategic “impediments to growth.” 

Duran hopes to boost a firm’s growth and equity value to increase, if not double, the firm’s multiple when the time comes to sell. Rising Growth’s business model is based on sharing the profits from an anticipated multiple expansion as well as receiving a recurring share of the firm’s revenues proportionate to its investment.

Incumbents counter
Established players in the space have taken notice. 

Merchant, which says it has minority stakes in nearly 80 firms and hopes to add 30 more, is reportedly looking to raise between $400 million and $550 million. Emigrant, which has stakes in 20 firms with $95 billion in combined assets, brought in three new senior executives as part of new CEO Jennifer Souza’s growth initiative. Kudu Investment Management has also been active, snapping up a block of shares in $23 billion Texas-based investment manager Sage Advisory Services earlier this month.

Expect to see even more minority investors enter the market, said Brandon Kawal, principal for Advisor Growth Strategies. Buying minority stakes “is the blue ocean of RIA M&A when you consider that 70 per cent to 80 per cent of reported transactions are majority purchase and full integration,” Kawal said.

Both Constellation and Rising Growth are well positioned, he said.  

“Both firms have teams and leaders that are known quantities,” Kawal noted. “They also seem to focus on value-add strategic help and have teams that can help improve ongoing operations. That’s a unique strength. Having capital is not enough.”

3) New M&A power player?
Will sovereign funds be the next big market movers in the booming RIA M&A space? 

That’s provocative thought leader Mark Hurley’s latest prediction, and some very smart M&A experts think he may be right. 

Hurley, the founder and former CEO of Fiduciary Network best known for his prognosticating white papers on the future of wealth management (and titanic legal battles with ex-partner Howard Milstein, the billionaire New York banker) is back on the scene as head of a cybersecurity firm, Digital Privacy & Protection.

Hurley unveiled his latest 88-page missive (written with five other co-authors), “Welcome to the Jungle: The Next Phase of the Evolution of the Wealth Management Industry” at the recent MarketCounsel Summit, arguing that sovereign wealth funds will eventually disintermediate private equity investors as serial advisory firm acquirers consolidate.

The wealth management business has become “a large enough investment opportunity” to attract the gigantic funds, Hurley asserts, and are vehicles where they “could put several billion dollars to work for 15 to 20 years.”

Interest from the Middle East and Asia
“It’s plausible,” said investment banker Steve Levitt, managing director of Park Sutton Advisors. “These funds are very large and look to meaningful amounts to work. I’ve heard that some of the funds in the Middle East and Asia are especially interested.”

Sovereign funds may well target RIAs, but the investments “would not likely have a profound impact on the space,” said longtime M&A guru David DeVoe. Even so, the investments would be welcomed, DeVoe added.

“Many of Hurley’s points are spot on, especially regarding the current state of advisors,” he said. “Key challenges related to organic growth talent and operations are real and are hard to improve.”

Critics have pointed out that Hurley has been wrong in the past. Twenty five years ago he predicted that about half of the top 1,000 advisory firms would consolidate into 25 to 50 “scale competitors” while the rest would be niche players with zero enterprise value.

Private equity alive and well
But Hurley did foresee the rise of outside investment in the industry, a prognosis that was realized by an influx of private equity capital beginning around 10 years ago. And that trend is far from over, according to Levitt and DeVoe.

“We continue to be contacted by new PE groups every week who seek to put money in the space,” Levitt said. “I think they are going to participate in this market for years to come.”

Private equity’s interest in the RIA space “remains at an all-time high,” according to DeVoe. “They see this as an attractive market that is still in the early innings of its life cycle. Highly fragmented industries with high margins are going to attract PE.”