The end of M&A ‘cheap capital’ is near

After a decade of strong economic gains, the Federal Reserve raised interest rates three times this year, with one more hike expected before year-end. That means access to inexpensive capital for RIAs looking to fund growth-by-acquisition may be tightening, says Anders Jones, Facet Wealth CEO.

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“The market is not going to keep going up forever,” Jones says. His Baltimore-based firm recently landed $33 million in funding with the premise of providing personalized financial advice to the mass-affluent crowd. Facet Wealth acquires clients with too few assets to be profitable at their current RIA and uses proprietary technology to service them for a flat annual fee. Clients have the option of coming on board or moving their assets elsewhere.

Facet hopes to monetize limited accounts with the promise that if those clients reach over $1 million in assets, the firm will offer to move them back to the advisor. “We want to be seen as a partner to the industry, not as a competitor,” Jones says.

Leading the round of funding was investment firm Warburg Pincus, which was also a major investor in Financial Engines. Also participating in the round was venture capital firm Slow Ventures, which had previously invested in Facet Wealth.

Financial Planning caught up with Jones on the sidelines of the Schwab Impact conference this year in Washington where he talked interest rates, Amazon entering wealth management and prime opportunities for RIAs.

What’s going on with the red-hot M&A market?

Capital is not going to be nearly as cheap as it has been since 2008. Advisor margins have risen steadily while efficiency has remained the same. They’re making around twice as much money as a decade ago. The problem is that it’s going to end. The market is not going to keep going up forever, meaning cheap capital is coming to an end. If there’s a 20% downturn that will start to flow to the advisor who will end up losing 50% profits. Those premiums in the M&A market are going to disappear.

What’s the biggest threat advisors face?

This trend toward professionalization. If you’re a $200 million firm, the question becomes: Do I want to get a leg up and go for the next stage of growth or remain a lifestyle practice? That’s a big challenge folks will have to wrap their arms around. To get to the next level, there’s a huge integration challenge. How and where do you even start? I’m long on practice management and third-party integrations.

Will Amazon enter?

There are two main challenges providing financial services. There’s the actual service and then there’s distribution. Providing the service won’t be the problem for Amazon because it’s really not that hard to do. We’ve spent a lot of time working on our product with a 12-person team over three years. Amazon can turn that on pretty quickly. Distribution is the other problem for newcomers. Again, Amazon has relationships with every household in the country. But I’m less worried about it. They would be more interested in a banking relationship than wealth management.

Where do you see the most opportunity?

The old saying ‘find your niche and get rich.’ For us, we’re targeting baby boomers that are transitioning from work to retirement that have a capped asset base anywhere from $55,000 to $350,000 max. They have kids about to go to college, living off retirement income and parents that are still alive and that becomes a complex time in someone’s financial life when they need the most help. Unfortunately, that’s a nightmare client for a traditional advisor.