They’re investing how much in AI?

Some of the world’s most recognizable tech giants like OpenAI, Softbank and Oracle announced a joint venture last week that would pump $500 billion into artificial intelligence infrastructure in the US over the next four years. Not to be outdone, Meta said it plans to spend as much as $65 billion on AI development this year alone. Then DeepSeek, China’s answer to ChatGPT, set off an international AI arms race over the weekend that led to about a $1 trillion thrashing of tech stocks on Monday. 

It’s the latest in a string of developments that could kick off a new era in AI investing and has advisors closely monitoring their tech allocations. “You have to be very careful when there is a generational tech change,” said Leo Kelly, founder of Verdence Capital Advisors. “People get less discerning, you get explosive gains, and I think we’re there.”

Semi-Charmed Kind of Conductors

The new investments are throwing fuel on the AI fire, pushing already sky-high valuations into the stratosphere. Nvidia has risen more than 200% in about 18 months, while the tech-heavy Nasdaq jumped 53% and trades at a multiple of 16 times its companies’ earnings, per Reuters. That’s impressive alpha, but Monday’s DeepSeek wipeout served as something of a reality check — and an opportunity to approach the sector with a new lens. While public companies are pricey, there are private ones that can help tap the new developments, Kelly said.

“We’re looking for companies that are getting bolted on the chassis,” he said. Some of the venture funds he researched were from companies like Grit Capital, Millennium Media and New Enterprise Associates, and included early-stage startups that are designing the killer apps to sit on top of all the AI infrastructure. It usually takes about five years to have a fully invested PE portfolio, he said. “It’s a long play — and a patient play — but it has major upside,” Kelly said.

Everything’s Better Abroad. International companies may also benefit from heavy doses of US investment. There are “hidden gems” around the world that many investors simply don’t know exist, said Adam Patti, co-founder of the asset manager VistaShares. Every AI-related fund is massively overweighted in companies like Apple, Amazon, Google, Meta and Microsoft. Instead, his AI-focused fund invests in data centers and advanced semiconductor companies like South Korea’s SK Hynix and Taiwan’s TSMC.

“If the question is why all of these investments are being made, the answer is simple: This a global arms race that will change the way we live,” he said.

With any kind of AI investments, advisors will need to remind clients about the need to stay diversified, take profits and rebalance. Sure, some gains may be left on the table, but it’s about protecting assets long-term, Kelly said. “Where people really get really hurt is when they stop being disciplined, and egos and greed kick in,” he said. Ah, the animal instincts.

Last year wasn’t just good for M&A activity in the RIA space — it was the best. 

The industry experienced unprecedented levels of dealmaking, topping 272 transactions in total, according to DeVoe & Company. That included a high of 81 deals in the fourth quarter and a monthly record of 39 in October. The record highs were due in large part to post-election market gains and high valuations that had owners more open to selling, as well as declining interest rates in the fourth quarter, and the on-going need for succession planning. That breakneck pace for M&A activity isn’t expected to slow down as we settle into 2025.

“These factors collectively set the stage for a historic year and strong momentum heading into 2025,” CEO David DeVoe told The Daily Upside.

Kind of a Big Deal

Not only were there tons of handshakes in 2024, the industry landed some of the largest deals to date. For example, Mubadala Capital, an Abu Dhabi state-owned investment firm, took CI Financial private in a deal in November that valued the Canadian asset manager and serial RIA buyer at $8.6 billion. Less than a month into the new year, the industry is already seeing similar deals going down, paving the way for a strong 2025:

• Mariner struck a deal to acquire Cardinal Investment Advisors, adding $292 billion in assets under advisement and about 40 employees to its practice. 
• RIA and financial planning firm Integrated Partners purchased RetirementDNA, expanding its West Coast footprint and gaining an advisory team with more than $1 billion in AUM.
• Nearly half of all advisors are interested in acquiring other wealth management practices, according to a recent Cerulli survey.

DeVoe said M&A activity could grow in 2025, supported by the continued appeal of scale, high valuations, and attractive deal structures. 

Is This Even Organic? But, there’s a key problem just below the surface of these multi-million, and even billion-dollar, deals: organic growth. Expansion through internal operations has plummeted from 9% in 2017 to less than 3% in 2023. Many firms have simply deprioritized investments in growth initiatives, according to DeVoe. That is not a recipe for success.

DeVoe said that failing to grow organically is a major missed opportunity for advisory firms, and cited data that showed a 1% increase in organic growth leads to a 7% rise in firm valuation. “Growth isn’t just a nice-to-have, it’s essential for sustained success,” he said.

And you call yourself an advisor?

Disclosure and transparency are top priorities for financial regulators, and professional titles are now attracting plenty of attention. The North American Securities Administrators Association wants to limit who can use the title of “advisor” and recently wrapped up a public comment period on the proposal. The oldest international investor protection organization said in November that broker-dealers and agents who use the designation are acting unethically and could be misleading investors regarding what services they actually provide. The securities regulators proposed in 2023 that only registered fiduciaries should be allowed to call themselves advisors. 

More recently, top industry firms laid out their arguments for or against the proposal. So, where are we now? 

Read more.