Transaction Advisory, Investment Management

October 12, 2020

Low Rates and NIM Margins Spur Bank Interest in the Wealth Management Sector

Executives Seek Revenue Streams That Aren’t Tied to Interest Rate Movements

COVID-19 adversely affected sector M&A for a couple of months when most of the U.S. was under shelter at home/safer in place orders.  However, deal activity is recovering quickly and now could be further accelerated as banks look to replace lost interest income with fee-based revenue.  An increasing number of clients on the banking side of our practice are showing interest in the wealth management space, and it’s easy to understand why.  Long-term rates hovering at historic lows have significantly impaired net interest margins, so banks are exploring other income sources to fill the void.  Wealth management is a natural place to start since so many banks already offer financial advisory services of one form or another. There are many other reasons why banks have wealth managers on their radar:
  • Exposure to fee income that is uncorrelated to interest rates
  • Minimal capital requirements to grow assets under management
  • Higher margins and ROEs relative to traditional banking activities
  • Greater degree of operating leverage – gains in profitability with management fees
  • Largely recurring revenue with monthly or quarterly billing cycles
  • Sticky client base
  • Access to HNW/UHNW client base and opportunity to increase wallet share
  • Potential for cross-selling opportunities with bank’s existing trust and wealth management clients
These incentives have always been there, but COVID amplified the banking industry’s need to diversify their revenue base, and RIA acquisitions are almost always immediately accretive to earnings.  The shape of the current yield curve suggests that long-term rates are likely to stay below historic norms for quite some time, dampening the outlook for bank interest income.  Acquiring an RIA or bulking up an existing wealth management practice with experienced advisors is a relatively easy way to pick up non-interest income and improve profitability.  Building-up non-interest income is also an effective hedge against a further downturn or future recessions that might require the Federal Reserve to lower rates even further. Still, there are several often overlooked deal considerations that banks and other interested parties should be apprised of prior to purchasing a wealth management firm.  We’ve outlined our top four considerations when purchasing RIAs in today’s environment:
  1. With most of the domestic equity markets back to near-peak levels, the financial commitment required to purchase a wealth management firm has likely increased in recent months, lowering the prospective ROI of an acquisition. We often see some temptation to pay a higher earnings multiple based on rule-of-thumb activity metrics (% of AUM or revenue), but we would typically advise against paying above normal multiples of ongoing EBITDA for a closely held RIA, absent significant synergies or growth prospects for the target company.
  2. Since many wealth management firms are heavily dependent upon a few staff members for key client relationships, many deals are structured as earn-outs to ensure business continuity following the transaction. These deals tend to take place over two to three years with a third to half of the total consideration paid out in the form of an earn-out based on future growth and client retention.  COVID-19’s impact on the markets and economy has elevated the demand for buyer protection, and many banks are now requiring larger earn-out components to protect themselves from future downturns or client attrition.
  3. It’s hard to know how the cultures of firms in any industry will mesh after a merger, and this side of due diligence has been most affected by COVID-19, as in-person meetings are still generally being avoided.  The culture issue is especially true for bank acquisitions of wealth management firms.  Compensation, work habits, client service expectations, and production goals can be drastically different at an RIA versus a bank, so it’s important to consider if these discrepancies could become problematic when the firms join forces.  We’ve seen culture clashes blow up deals that looked great on paper.
  4. Degree of Operational Autonomy. Wealth managers (and their clients) value independence.  Individual investors typically must consent to any significant change in ownership to retain their business following a transaction and may not be willing to do so if they feel that their advisor’s independence is compromised.  Senior managers at the target firm will likely need to be assured that the new owner will exert minimal interference on operations and strategic initiatives if key personnel are to be retained.
These considerations manifest the need for an outside advisor to ensure that proper diligence is performed and the transaction makes sense from an economic perspective.  Bank boards need practical guidance on finding the right RIA at the right price and assessing cultural differences that could wreck the integration after the ink dries.  As always, we’re here to help.
Author
Brooks K. Hamner
Senior Vice President
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March 2026 | Capital Allocation: The Strategic Decision in a Slower Growth Environment
Bank Watch: March 2026

Capital Allocation: The Strategic Decision in a Slower Growth Environment

Following several years of balance sheet volatility and margin pressure, the operating environment for banks improved in 2025 as most posted higher earnings on expanded net interest margins. The outlook for 2026, at least prior to the outbreak of the U.S./Israel-Iran war, reflects(ed) a relatively stable operating environment.Stability, however, introduces a different challenge. Loan growth has moderated across much of the industry, and the benefit from asset repricing has largely been realized. In this environment, earnings growth is less dependent on external tailwinds and more dependent on internal discipline. As a result, capital allocation has moved to the center of strategic decision-making.The Expanding Capital Allocation ToolkitCapital allocation discussions are often framed around dividends and, to a lesser extent, share repurchases. In practice, the range of capital deployment decisions is broader and more interconnected. Banks today are balancing:Organic balance sheet growthTechnology and infrastructure investmentDividendsShare repurchasesM&ABalance sheet repositioningRetained capital for flexibilityEach alternative carries different implications for risk, return, and long-term franchise value.Organic growth often is the preferred use for internally generated capital when the risk-adjusted returns exceed the cost of equity. However, competitive loan pricing and a tough environment to grow low cost deposits have narrowed spreads, reducing the margin for error. Similarly, technology investments may improve efficiency over time but require upfront capital with uncertain timing of returns.Returns, Valuation, and Market DisciplinePublic market valuations provide a useful lens for evaluating capital allocation decisions. As shown in Figure 1(on the next page), banks that generate higher returns on tangible common equity (ROTCE) tend to command higher price-to-tangible book value multiples. This can also be expressed algebraically, at least on paper, whereby P/E x ROTCE = P/TBV, while P/Es reflect investor assessments about growth and risk.This relationship reflects a straightforward principle: capital should be deployed where it earns returns in excess of the cost of equity. When internal opportunities meet that threshold, reinvestment should be appropriate. When returns are below the threshold, returning capital to shareholders through special dividends or repurchases may create greater per-share value.Share repurchases, in particular, can be an effective tool when executed below intrinsic value and when capital levels remain sufficient to support strategic flexibility. However, repurchases that do not improve per-share metrics or are offset by dilution from other sources may have limited impact.Figure 1: Publicly Traded Banks with Assets $1 to $5 BillionBalance Sheet Repositioning as Capital AllocationIn some cases, capital allocation decisions are embedded within the balance sheet itself. One example is securities portfolio repositioning.Many banks continue to hold securities originated during the low-rate environment of 2020 and 2021. While unrealized losses associated with these portfolios have moderated, the yield on these assets often remains well below current market rates.Repositioning the portfolio, by realizing losses and reinvesting at higher yields, represents a tradeoff between near-term capital impact and longer-term earnings improvement. In effect, this decision can be evaluated similarly to other capital deployment alternatives, with management weighing the upfront reduction in Tier 1 Capital against the expected lift to net interest income and returns over time.As with M&A, the concept of an “earnback period” can be applied. Institutions that approach repositioning with a clear understanding of the payback dynamics are better positioned to evaluate whether the strategy enhances long-term shareholder value. We offer the caveat that institutions who evaluate restructuring transactions should compare the expected return from realizing losses (i.e., reducing regulatory capital) with instead holding the securities and repurchasing shares. If the bank’s shares are sufficiently cheap, then it could make sense to continue to hold the underwater bonds until the shares rise sufficiently.M&A and Capital FlexibilityM&A remains a viable capital deployment option, particularly for institutions seeking scale or improved operating efficiency. However, transaction activity continues to be constrained by pricing discipline, tangible book value dilution, and investor expectations around earnback periods.Public market valuations ultimately serve as a governor on deal pricing, reinforcing the importance of aligning capital deployment decisions with shareholder return expectations.Conclusion: Discipline Drives OutcomesIn a slower growth environment, capital allocation is not a secondary consideration; it is a core driver of performance. While banks cannot control market multiples, they can control how capital is deployed across competing opportunities.Institutions that consistently allocate capital with a clear focus on risk-adjusted returns, strategic alignment, and per-share value creation are more likely to generate sustainable growth in earnings and tangible book value. In the current environment, disciplined execution may prove more valuable than more aggressive but less certain alternatives.
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