The Consolidation Stars Remain Aligned in 2020

The advisory, insurance and asset management industries have never been so ripe for consolidation, merger and acquisition experts agree.

Both Fidelity and PwC have recently published new research analyzing the ongoing wave of merger and acquisition (M&A) activity in the financial services industry.

According to PwC’s reporting, the industry has never been so ripe for consolidation. The firm cites “fundamental challenges” to the sector’s business models and pricing structures that will “probably trigger another wave of consolidation in coming quarters.”

Fidelity’s analysis reaches similar conclusions, showing 74% of firms that have recently made acquisitions or entered into a merger are planning to conduct more M&A activity in the future.

According to PwC, in addition to advisers and recordkeepers, other subsets of the financial services industry are seeing their own consolidation pressures. For example, the firm projects that 20% of mutual fund asset managers will be acquired or eliminated by 2025.

“Although the industry is growing on the whole, assets are becoming increasingly concentrated among a handful of top players,” the firm explains. “We expect that trend to continue. In order to survive, active managers who experience significant investor withdrawals will need to evolve or, more likely, consolidate. We believe that managers should expect fee compression to intensify as equity markets cool down.”

PwC says fee pressures are leading to strategic shifts among top providers.

“Several large discount brokerages eliminated commissions on stock and ETF trades during the third quarter of 2019, following the lead of Charles Schwab,” PwC reports. “This fundamental shift in business model triggered the sale of TD Ameritrade to Charles Schwab in November in an all-stock transaction of about $26 billion. A deal of this magnitude may not occur in 2020. Still, we expect to see another round of consolidation and deals involving discount brokerages of all sizes.”

Indeed, a number of brokerages have said publicly in recent months that they are open to a combination or other strategic alternatives, PwC reports.

Another M&A trend to watch in 2020 is the convergence of asset managers and insurers.

“While this trend is not new, we have seen an acceleration of transactions between the two sub-sectors in both directions,” PwC reports. “We expect asset managers to acquire insurance companies in an effort to boost assets under management. Such deals would also provide a stable source of capital and a long-term stream of fees.”