PANC 2020: Adviser Industry M&A From an Academic Perspective

Larger, more established firms are acquiring wealth management and RIA firms.

Speaking virtually at the 2020 PLANADVISER National Conference, Mark Bruno, managing director of ECHELON Partners, said that, for the past several years, there have been more and more wealth management mergers and acquisitions (M&As), especially in the independent part of the market.

“This is an incredible time for M&As for wealth management,” Bruno said. “Discussions between players are the most active that the industry has ever really seen.”

ECHELON, an investment bank that focuses exclusively on wealth management, is the No. 1 investment bank providing advisory services for registered investment advisers (RIAs) with $1 billion or more in assets under management (AUM), Bruno said. Since being founded 20 years ago, ECHELON has handled more than 400 investment banking assignments and 1,500 valuations, he said.

This year, ECHELON forecasts there will be 175 wealth management M&As, a 16% year-over-year decrease from last year, or 28 fewer deals. “In 2019, there were 203 wealth management transactions—a record, by far,” Bruno said. “All indications heading into 2020 were that the seven-year streak of M&A deals increasing each year would extend into an eighth year, and then COVID-19 struck.”

Bruno said that because M&A activity for wealth management firms had been so strong for so long, even with advent of COVID-19 and market declines, those events “did not kill deals, but they did delay many. There was a 15% decline in transactions in the first quarter. The deals that are being executed typically involve larger, more established buyers and sellers that have been capable of focusing on M&A during a challenging business environment. Acquisition targets continue to increase in size, along with the sophistication and professionalism of buyers.”

Most notably, many buyers are “acquisition platforms that call themselves integrators,” Bruno said. “They are really trying to help the companies they are purchasing with growth, and, like 2019, this year, a number of firms have done multiple acquisitions. This is making the industry less fragmented. Those being bought can plug into a national or regional network and enjoy significant growth opportunity they would not have seen had they remained independent. We expect more consolidation by these aggregators. ”

ECHELON expects that the pandemic will pass and that “the outlook and pipeline for 2020-21 indicates more deal activity and a return to 2019 levels is likely,” Bruno said. “Third quarter 2020 deal activity is expected to close 25% higher than the second quarter but still lagging year-over-year from 2019. We expect 44 deals will close in the quarter.”

Also of note, Bruno said, “even with the sharp, 25% market downturn in the first quarter, valuations have held strong, primarily because most RIAs have diversified portfolios.”

Bruno said there are primarily three motivations driving a company’s desire to be bought. First is the motivated sale, whereby an adviser is looking for a lifestyle change, or to diversify holdings and with shareholder considerations in mind. Second is an opportunistic sale, where a company approaches the firm with an attractive offer, or where a company believes its business has peaked and it is the right time to exit. Finally, there is the strategic sale, where increasing costs and competition pose a threat. The company may see a path for new markets or clients through a sale, or, perhaps operational efficiencies.