Leading with a stable vision in unstable times

RIA’s mergers and acquisitions activity broke records last year thanks to low interest rates and a robust business climate. In the quarter of 2022, the business world faces inflation, rising interest rates, continuing waves of COVID-19 and conflict in Europe. How can leaders maintain a stable business vision in what appears to be volatile times? Contingency planning is key.

Many business leaders create and follow a strategic plan to achieve their business goals each year. Traditionally, professionals in the financial services industry, including RIAs, have compliance and risk in mind when developing strategy and making decisions. Global and domestic events are raising questions among business owners about security and rising interest rates, respectively.

cyber security

At a recent RIA conference, the conversations focused on technology and hackers. Financial services are among the main industries targeted by these modern day bank robbers. In 2019, financial companies suffered up to 300 times more cyberattacks than other companies. Last year, the banking industry saw a 1,318% year-over-year increase in ransomware attacks in the first half of 2021, according to a Trend Micro report.

Although no one can control the next computer system, we can think and plan a step forward to reduce risk.

  • Lenders are required to communicate risks. In fact, new cybersecurity rules came into force on April 1, 2022, with a compliance date for banks of May 1, 2022. Banking institutions are required to report any major cybersecurity incident to their primary regulator. government as soon as possible, but no later than 36 hours of discovery. Banks must also inform customers if they are faced with an incident with an impact that lasts more than four hours. This rule further signifies the responsibility of all institutions to protect the assets/information of their customers.
  • With the new rules in place, align with your bank’s cash management team using the security tools provided. Online and mobile account tools allow bank customers to customize security alerts, including two-factor authentication. Set up double check systems to require two people in a company to approve spending on a set amount before payment can be sent. Positive payment allows a banking system to recognize duplicate payments and alert customers before the transaction is complete.
  • Look for cybersecurity insurance that provides coverage to protect against data breaches and other cybercrimes, including malware and phishing. Most banks now require this type of insurance as part of their commercial loan requirements.

Interest rate

In March 2022, the federal funds rate increased by 25 basis points and future rate hikes are expected. Our team hears client and prospect concerns about rising interest rates, long-term debt and the potential for restructuring.

Business owners should now work with their lending partners to optimize the ideal balance of debt with limited interest rate risk, while historically low interest rates are still in place. Don’t give up on strategic plans, review and modify them with plan B, if necessary. Many owners have designed business strategies with growth around mergers and acquisitions. Some owners are a few years away from retirement and are considering selling as an exit strategy.

Whether your business is focused on long-term growth or a short-term exit strategy, it’s important to understand the current landscape. According to DeVoe & Company 2021 4Q RIA Deal Book:

  • RIA’s merger and acquisition activity set a record last year. There were 242 deals recorded in the $100 million+ segment, compared to 159 deals in 2020.
  • Twenty-one firms executed 129 deals, an average of six deals each, with the top 10 acquirers absorbing 46% of total deals last year.
  • Company valuations are high and span a wide spectrum, with nearly 40% of advisors saying they expect valuations to rise in 2022.

Regardless of the size of the RIA business, a contingency planning strategy and vision should take place on a regular basis. Frequently ask yourself the following question: Does the changing financial landscape directly affect the company’s vision and strategic plan? If so, adjust as needed.

Consult your accountant and use online planning tools to assess the impact that interest rate hikes might have on an acquisition strategy. For example, most lenders have online calculators that allow customers to create loan estimates. Be sure to focus on the long game. Rates fluctuate and loans can be refinanced in the future. It’s important to have a good partner who understands the need to assess their liabilities on a regular basis and who has the stability and availability of capital to continue to give you access to debt for future opportunities.

Consider how a business strategy might be affected by a company’s debt and how the changing financial landscape impacts it. For companies that use debt as part of their growth strategy, this could be a problem if they are overleveraged. What is the contingency plan to reduce debt in order to continue growth?

Business owners considering a short-term exit strategy may want to consider an accelerated acquisition schedule as valuations are expected to continue to rise in 2022. Selling high is a great retirement mantra.

The business climate is changing and world events are happening. Strategies and plans are not designed to be inflexible. How leaders adapt and determine what is in control to keep functioning is what separates good business leaders from great business leaders who lead with a stable vision.

Rick Dennen is the Founder, President and CEO of Oak Street Funding, based in Indianapolis, a First Financial Bank company with lending products and services for specialty industries, including chartered accountants, registered investment advisers and insurance agents nationwide.

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