RIA Buyers Getting More Selective: Fidelity M&A Report

Fidelity Custody & Clearing’s 2016 Wealth Management M&A Transaction Report discovered that advisory firms acquiring other RIAs are getting “much more selective,” says David Canter, but there remains a “gulf between what the sellers think” their firms are worth and what buyers think those firms are worth.

Canter, executive vice president for practice management and consulting at Fidelity Clearing & Custody, said in an interview that larger RIAs looking for acquisitions are “getting better” at transactions, talking to more firms before buying and knowing “what they’re looking for” in an acquisition. What they’re looking for are similar client service abilities and human capital, “not just firms with recurring revenue and profitability,” he reported.

That greater selectivity among prospective buyers, and their interest in acquisitions to meet their business growth goals, should send a message to prospective sellers, suggests Canter. “Be very vigilant,” he said, on “what kind of talent” you have at your firm if you’re considering selling.

“Buyers are skeptical of buying firms without talent that can help them grow,” he said, plus those buyers now conduct a “detailed analysis of the book of business,” including the demographics of the firm’s client base, what percentage of clients are in the decumulation phase and the “relationship the firm’s advisors have with the next generation” of clients.

As for actual wealth management M&A activity in 2016, Fidelity said there was “healthy activity,” counting 104 transactions representing nearly $67.1 billion in assets under management. Strategic acquirers accounted for 37 of those transactions, with RIA acquirers accounting for 31 deals and banks doing nine deals.

The Fidelity study doesn’t just count the number and size of transactions, but also uses the insights of its M&A Leaders Forum, blue-chip individuals who are leaders of acquisitive firms such as Savant Capital and Mariner Holdings, so-called rollup firms like Dynasty Financial and United Capital, long-time wealth management investment bankers like Mark Hurley’s Fiduciary Network and independent broker-dealers like Cambridge Investment Research and Ladenburg Thalmann.

At a Forum meeting in November 2016, its members identified four major trends in RIA acquisitions, according to the Fidelity study:

1. Acquirers are increasingly prepared, well capitalized, and sophisticated, yet are experiencing increased competition for a relatively small pool of attractive target firms.
2. Unlike in the past when AUM “rollup” was the primary M&A objective, acquirers today are using M&A as means to pursue strategies such as talent acquisition, scale, improved advisor productivity, and growth.
3. The advisor community is largely unprepared for M&A and lacks awareness on the right time to sell.  Too many desire to maintain independence and lifestyle elements while failing to see the forces driving increased industry consolidation.
4. Acquirers demonstrate greater interest today in understanding and addressing seller motivation as well as understanding the specific challenges each advisory firm seeks to solve through M&A.

Since the global financial crisis, Canter said Fidelity has seen “steady growth in the number, size and scope” of larger RIA firms—those with $1 billion or more in AUM—buying other RIA firms. In 2016, 26% of RIA acquisitions were conducted by those larger firms.