The data is still being gathered, but preliminary results suggest the pace of consolidation in the RIA space was barely hampered by the effects of the global pandemic that effectively shut down, or at least locked down, much of the global economy.
While the initial shock from COVID-19 came during the first quarter, which saw the S&P 500 Index fall by 30% in less than four weeks, the lagging nature of acquisition activity didn’t start showing up until the second quarter.
“When the year started it was still on the same pace as the record 2019 levels, but deal cycles are nine to 18 months from beginning to end and Covid pushed a lot of deals sideways,” said Mark Bruno, managing director at Echelon Partners.
“We didn’t see deals fall apart but they became lower priorities, and then we saw normal deal activity resume in late May and early June,” he added.
Echelon’s data tracked 203 registered investment adviser acquisitions in 2019.
The first quarter of 2020 was partially impacted by COVID-19 and saw 46 RIA M&A deals announced, but the impact really took hold during the second quarter when just 35 deals were announced, matching a level not seen since 2017.
But by the third quarter, which saw 55 deals announced, RIA M&A activity appeared to be back to full speed.
“The bottleneck from the slowdown got everyone back to work on deals at once,” Bruno said. “And that contributed to a record third quarter, which could set another record in the fourth quarter.”
If nothing else, 2020 proved that the forces behind the gangbuster pace of consolidation in the advisory space are apparently bigger than a global pandemic.
One of the breakout M&A stories of the year was Toronto-based CI Financial, which had never bought a U.S. RIA prior to February but managed to lock down 13 acquisitions through Thanksgiving.
The vigor of CI in gobbling up $21 billion worth of U.S. advisory assets drew some criticism from competing aggregators, but chief executive Kurt MacAlpine makes no apologies for his aggressive push across his southern border.
To help finance the company’s growth through acquisitions, CI listed on the New York Stock Exchange in November.
“The timing for this listing makes sense given the rapid growth in our U.S. wealth management business,” MacAlpine said.
Industry watchers believe RIA M&A deals must continue because once firms reach a certain size organic growth alone won’t cut it.
In addition to CI Financial, Bruno cited examples of such aggressive buyers as HighTower Advisors and Wealth Enhancement Group that have lots of capital to put to work.
“Their business models are based on acquisitions and that’s how they grow,” he said. “These firms all have deal teams in place and it’s getting more competitive, so you’re only going to see more of it.”
David DeVoe, chief executive of DeVoe & Co., said the consolidation trend is creating what he describes as META firms, which stands for “most effective tactics available to win the game.”
DeVoe said there are currently about two dozen such META RIAs, each with more than $10 billion in client assets, and he said they will act as both pioneers and engineers to “take the industry to the next level.”
However, this trend toward ever-bigger firms does not necessarily box out the smaller RIAs, DeVoe said.
“Low barriers to entry, attractive profit margins, and the ability of an adviser to provide great value to a client helps secure space for all sizes of advisers in this evolving industry,” he said. “We don’t expect small or medium-sized firms to get squeezed out of the marketplace, but these META RIAs will be competitive with strong value propositions, thereby forcing other firms to up their game.”
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