With very bustling M&A activity, the Canadian wealth management industry has never been so active like this past year. 

Mergers & Acquisitions are often the result of both successful and struggling companies needing to sell or merge – to survive and compete in an ever-saturated investor marketplace. 

While we have witnessed some recent successful ventures; we are going to witness evermore buyouts for a more tragic reason. Here’s why:

We can often divide firms into two classifications. Companies that are ‘incorporated’, often referred to as micro businesses or cottage businesses.

The other, are real businesses. Firms that have accumulated profits and allocated growth capital to build a firm, ie, transitioning from a micro company to a real professional business. That is not just the result of business skill and acumen but the ability to exercise strong firm fiscal discipline to grow a company into a real business based on exponential growth. This fiscal discipline is an art in itself. 

Like waiting for an early company with immense potential but too early to purchase, it requires the patience and intestinal fortitude to ride the full journey. And very often, the road is long and arduous. 

In my experience, I have seen many successful business owners and many less so.

We often associate smart investment acumen with strong business intelligence. Unfortunately, this is not the case. They are the perfect combination in any business- but they are not mutually exclusive. Ie, they can happen together but it is not necessarily so. 

The Canadian wealth manager scene is filled with a plethora of small, medium and large size firms. They range anywhere from 50M to the hundreds of billions. 

What separates a 1-2B AUM firm from a firm with only 50-200M in AUM?

Two critical ingredients. 

1. The ability to amass/possess capital within retained earnings for business growth. 
2. The single desire and focus to grow a business, sacrificing one’s own personal temporary needs-lifestyle, in order to accomplish this single objective. 

We see a number of small micro boutiques (40-300M) who have been in operation for many years but have flatlined. Not due to poor investment performance but the inability to invest capital to grow a business

Very often, seasoned investment managers with no personal history of sales or marketing, come from a very different place: Deriving from an insurance or mutual fund co background, they tend to assume their old (previous employer) or current “track record” will carry them through the day. That is most often not the case. 

While the ‘Investment Manager’s past performance with Insurance companies – mutual fund companies are inextricably tied with the brand, that is not the case with Private Wealth Managers. 

The majority of Private Wealth firms don’t have the same end user client: whereas Advisors are far more tied to brand, individual HNW investors are not. They are not buying mass market funds but individual portfolios or model pools of the firm itself. As such, the past performance of a former Investment Manager at Mutual Fund Co X now turned Portfolio Manager at ‘Y Private Wealth’ is irrelevant. 

That Portfolio manager must now recreate his/her own brand and start a new track record for their strategy/portfolio. This task takes time, money and a whole lot of intestinal fortitude. A skill few portfolio Manager-Business Owners are equipped with. Very often this is a 3–5-year horizon at the bare minimum.

Many Portfolio Managers from the older generation live on the old notion that a silent, unseen HNW market will be aware of this individual and their evolving track record in progress. There is simply is no one out there to create and build the new narrative to a competing investor market. That is the big deficiency gap. 

I call these owner-portfolio managers of these small boutiques the ‘Willy Lomans’ of the industry. They are small barely viable companies hanging on. 

Willy couldn’t build his business for one of two reasons: 

1. Because the owner couldn’t deploy enough capital aside to hire his/her Chief Sales Officer. This individual is equally important as the investment management process itself: An investment strategy without a narrative is irrelevant and a narrative without an investment strategy is equally irrelevant. In essence, both are sufficiently required to operate. One without the other is a failed recipe.

2. The Owner-Portfolio Manager doesn’t view the Sales function as an inherently equally valuable function in order for the wealth manager to grow. This often stems out of pure intellectual superiority. One could also call this a form of snobbery! These business owners often feel they can operate without the existence of such function or the sales function must be subordinate to the Investment Management function. This is both false and ultimately self-destructive. 

Having observed the common action-behaviours of many wealth managers over the years, a few common themes stand out like a sore thumb:

1. Many boutique owner-managers have a deficient, biased view of sales professionals. Their own mindset becomes the biggest hindrance to business growth.
2. Since many of these Owner-CIO’s don’t have the same entrepreneurial bent as individuals coming from a Sales-Client Services background; they are more risk averse to allocating risk or growth capital to the sales function. This is evermore true when these owner – portfolio managers come from an insurance-mutual fund background, where the sales team was separate from the investment process, there was little to no direct contact and the sales function was a firm expense, not their own.
3. Investment Managers often suffer from limited understanding and value of the sales function. They often live in a siloed world of strategies, portfolios, buy & sell positions and theories. They are important. But, separated from a well constructive narrative with history, context and value add propositions, this becomes irrelevant. When a firm is reduced to pure numbers, it then becomes hard to separate it from its peers. A strong narrative is often the critical distinction that resonates with investors. This is ever so critical with an overabundance of wealth managers to choose from.
4. Whether Value, Growth or any other investment style; Investment Manager-Owners often have sharp investment acumen to spot great companies that generate strong returns over time. That skill requires much patience and fortitude. But they often don’t extend the same courtesy and patience to sales professionals whom require the same skills of time and patience to find  and build the narrative, preaching to a competitive investor market.

Many Owner-Investment Managers have great investment acumen to select great companies. They do so by identifying and measuring the key criterion that makes up strong sound businesses. 

But the same owners are often blind to looking at those fundamental criterion-and applying those investment fundamentals to their very own business. 

Because whether public or private in kind, many of those basic criteria are the same. And it is the rigid commitment to growing a business that makes a company attractive to investors alike. And that means client investors and owners of wealth managers themselves. 

Owners of these mini boutiques often wonder why they are not getting the healthy multiples they often see in these public transactions? Its rather a silly question. 

The answer is stupidly simple: the steadfast refusal to adhere to the very basic fundamentals of any sound business, makes you nothing more than a distressed business. And the market will dictate whether it is attractive for sale and at what price. 

The importance of Investment acumen should never be mistaken with business savvy. A strong business owner must have both to pay it forward. 

Mark Toren

President & CEO

Toren & Associates