2021 is just about behind us, and 2022 is knocking at the door. What are the 2022 trends in the financial planning advisory space that we consult? We had an opportunity to ask our experts what they see in their respective crystal balls...
Ryan Grau, CVA, CBA, VP of Business Valuation Services / Partner, FP Transitions. Trends in 2022 are going to be driven by our direct observation of what's happening in the marketplace. We keep tabs on transactions that we process, as well as transaction data reported by third parties. Historically, we've seen year over year increases in prices paid for financial advisory practices. 2021 was no exception. In fact, we saw pretty substantial increases that were higher than what we've observed in prior years, and that transaction data is direct information that goes right into our valuation results and influences the opinions that we provide to our clients.
In 2022, due to industry consolidation, as well as proposed tax changes, we do foresee that there are still going to continue to be strong merger and acquisition activity. As a result, we have a feeling there's still going to be strong price increases into 2022, and we'll keep a pulse on what's happening in the marketplace. And depending on what
the trends in transactions are, those will be directly refreshed, reflected in our valuation results.
Christine Sjölin, SHRM-SCP, VP of Strategic Development and Operations at FP Transitions. As far as my Trends of 2022 predictions for hiring practices and employee retention, I think we're going to start seeing the impacts of the great resignation really coming to hit financial planning practices. It's been a big it's been a big trend across the whole marketplace, and financial planners certainly aren't immune.
So what has happened with the great resignation? We haven't seen these employees show up in unemployment rolls. But we do have a trailing indicator around new business entities and DBA'S being filed, which is showing some indication that people are resigning from their positions and starting their own companies. And I think this will be very interesting to see for wealth management firms
because I think we'll see younger generations of advisors that are breaking away and have taken the time to reflect on their financial fulfillment and their professional fulfillment and their psychosocial fulfillment, and are going to be starting businesses on their own. The resources are certainly there to support a single owner practice. The technology exists, and as young financial planners, I would anticipate that they have the wherewithal to have built up a bit of a nest egg during the pandemic. And there's no dining out. There's no travel. Maybe they bought a Peloton, but I would expect to see some of these younger professionals have built up a nest egg, and they have the resources to weather a little bit of the entrepreneurial lifecycle. So I expect in 2022, we'll see a bit more young planners starting their own businesses going out on their own.
James Hughes, VP – Head of Investment Advisory Lending, Live Oak Bank. It's hard to predict the future and to come up with the trends for 2022. It would be more creative deal structures focused on taxes. In 2021, there was a surge of capital, coupled with the potential for cap gains increasing. This led to higher valuations and just a ton of transactions.
My thought would be 2022 would see somewhat of a pullback. I don't see the number of transactions plummeting. There's too much interest in inorganic growth and acquisitions and valuations are too frothy for sellers to just sit on the sidelines. So I don't see valuations going down, either.
But with no cap gains pressure, there may be an impact on the number of deals. Now, if cap gains does go up, there's some impact there that I think buyers will need to be more creative in their deal structures. You'll probably see more partial sales. You know, think about a founder selling a minority interest in their firm just to monetize some of the business. Or you might see more multiyear payouts just to lessen the tax burden.
James Fisher, JD, Vice President of Mergers & Acquisitions, FP Transitions. I think a trend we will see if 2022 is more focused acquirers in terms of the opportunities they seek and their deal structure. Many intrants into M&A over the last several years have been working to refine what works and what doesn’t within their organization from a merger or acquisition standpoint and I think these firms will continue to refine their M&A efforts accordingly.
I have heard some commentators opine that there will potentially be a decrease in M&A activity in 2022 given it does not appear likely that Congress will enact legislation that will significantly increase the long term capital gains rate as was originally proposed by the administration, thus easing the pressure on some firm principals and founders to sell, which would then decrease the supply of M&A opportunities.
However, irrespective of any potential change in the tax code, many firm founders and principals are still at an inflection point and must decide whether to continue as they currently are which for many includes wearing lots of hats within their organization, or whether it is better to find a partner firm that can relieve them of most, if not all of their managerial duties, and allow them to focus on the aspects of the business they enjoy most. This path also allows these principals and founders to take advantage of valuation multiples that are at a all time high. So, I do think the supply of M&A opportunities will remain strong irrespective of changes to the tax code.
As for the demand side of the equation, given the amount of capital that is available to be deployed for M&A in this space and the desire for inorganic growth, I don’t foresee a demand problem in 2022. In fact, I see demand increasing in 2022 as I feel there are many firms out there that are seeking to ramp up their M&A activities given the success some of the national firms have had expanding their footprint over the last several years.
To summarize, in 2022 I think the overall supply and demand for M&A will remain strong and practice values will remain elevated as long as there are no unforeseen external impacts to the marketplace.