The March stock market pullback and shock to the global economy at the start of the COVID-19 pandemic created only a temporary disruption to the pace of consolidation within the financial advisory space.
“The disruption didn’t last long enough to push advisers to the sidelines permanently,” said Peter Mallouk, president of Creative Planning, speaking Wednesday morning on a webinar discussing the state of merger and acquisition activity in the RIA space.
The sudden but relatively brief March stock market nosedive that saw the S&P 500 Index drop 30% in the span of four weeks served as a wakeup call to some advisory firm owners.
“It reminded everybody that if they hang out another quarter or two their practice could be worth close to nothing and it could be there for five years,” he said. “I think some people are thinking if they want to exit in the next few years, they need to be thinking about this practically.”
Mallouk joined Carson Group founder and CEO Ron Carson, Hightower Advisors CEO Bob Oros, Sanctuary Wealth CEO Jim Dickson, and Thrivent Financial head of the adviser network Luke Winskowski for the web-based discussion.
The executive panel, representing some of the most aggressive RIA buyers in the industry, generally agreed that consolidation is here to stay, and the pace will only increase as smaller firms recognize the advantages of scale.
“People are looking at their own technology and thinking maybe it’s not up to snuff,” said Carson, who described the sudden rebound from the March market lows as a chance for a “do-over” by advisers who might have worried that they missed the boat by not selling before the pullback.
The interest in selling now in the aftermath of the most recent wake-up call is even stronger, Carson said, because “there is not as much optimism that this thing will continue to go up.”
“It will cause M&A to accelerate because when people say they have a succession plan, most of them don’t have one that’s executable; it’s some loose-knit relationship with some guy across town,” he added.
Oros also referred to the March pullback as a “wake-up call” that has led more independent advisers to ask, “Do I want to continue to go it alone, or do I want a partner?”
While the panelists generally agreed that the pandemic hasn’t had much of an impact up or down on RIA valuations, especially since the stock market is now back where it was before the March crash, it has created a new reality in the way deals get done.
“Technology is challenging for some, but people are seeing it in a new light because they have to,” said Winskowski. “And because they have to, they’re finding it can make things easier.”
On that note, Dickson admitted the shutdown of travel and in-person meetings left him initially concerned that the M&A business would dry up, but that he has since been proven wrong.
“It was scary in the beginning, but you learned how to do new things,” he said. “We’re about to transition a bunch of teams that we have not met personally.”
Carson said his company currently has 15 deals in the pipeline, which is more than he had in the pipeline in the fourth quarter of 2019 before most people had even heard of the coronavirus.
Asked about consolidation among the large consolidators, Carson predicted that the industry will eventually end up with “10 or 12 massive players.”
Mallouk is in the same camp, envisioning a financial planning industry that follows the path of the accounting industry where there is a tight group of major firms dominating the space.
“I think this industry is ripe for a black swan event,” he said, citing the pending acquisition of TD Ameritrade by Charles Schwab Corp. as a potential “precursor to a black swan event,” that could drive changes including custodians charging fees to RIAs.
Carson agreed that the industry is “ripe to have a massive black swan event that we didn’t see coming,” which could upend the planning industry.
On the topic of the fee compression that is spreading across the financial services industry, some on the panel said it is not happening at the financial planning level.
“There’s mixed evidence that advisory fees are going down,” said Winskowski.
Oros is also “not a buyer of fee pressure,” especially when advisers are able to compete by offering more services.
“Fees have held up very well,” he added. “In a lot of cases, advisers are discounting when they don’t need to discount. If you’re offering world class advice, people are willing to pay for that. We’ve certainly seen that the robos did not prove to disrupt fees and relationships.”
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.