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The acquisition of Fi360 by Broadridge Financial Solutions is just the latest example of the consolidation wave that’s been taking place in the fintech sector, and we can likely expect much more of the same for the foreseeable future, according to fintech experts.

Broadridge said Thursday it plans to buy Pittsburgh, Pennsylvania-based Fi360, a provider of fiduciary-focused software, data and analytics for advisors and intermediaries.

Other M&As in the space in recent years included Orion Advisor Services gobbling up New York- based financial planning software startup Advizr over the summer and two of the most significant acquisitions of all in the sector: Envestnet’s purchase of software company Yodlee for $600 million in 2015 and its purchase of financial planning software group PIETech, owner of the MoneyGuide financial planning software, for $500 million in March.

We shouldn’t be surprised to see these same big buyers make additional purchases in the months and years ahead.

“We are always on the lookout for companies to add to our enterprise,” Fred Duden, global head of product development at Broadridge, told ThinkAdvisor. “The continually evolving nature of fintech and Broadridge’s collaborative approach to acquisitions means that there are always interesting and dynamic companies looking to join Broadridge, too.”

Of the overall consolidation we’re seeing in fintech, Duden said, it’s “largely driven by two related forces: fintech startups missing the bigger picture and large companies searching for a piece of that picture.” Although large companies have the option to build, buy or partner, it “does make sense sometimes to just buy the right piece [and] with various emerging technologies affecting wealth management, it’s not surprising to see larger companies seeking expertise in one specific area,” such as artificial intelligence or blockchain, he said.

Just like in many other industries, change in the wealth management sector is also “being driven by increasing customer expectations and advancing technology,” according to Cheryl Nash, president of investment services at financial services technology firm Fiserv. “We’re seeing businesses respond in order to meet those expectations and maximize new capabilities,” she said.

Not a New Phenomenon

Although it may seem that fintech consolidation started only within the past few years, Peter Heckmann, managing director of equity research at D.A. Davidson, pointed out Friday that the trend has “been a near constant for the last 30 years.”

The strategy of buying small and medium-sized companies to “build out” new technologies, gain “more to cross-sell to existing customers” and add to a firm’s customer list was “well executed” in the 1990s by companies including Fiserv (mainly banktech and payments) and SunGard, he noted.

More recently, it’s been Envestnet, Broadridge and SS&C Technologies that have been the top consolidators in investment technology, while Fiserv, Fidelity National Information Services and Global Payments have “all recently done multi-billion mega deals in payments,” Heckmann pointed out.

Although terms of the Broadridge-Fi360 deal weren’t disclosed, he estimated Fi360 “will be a nice addition to Broadridge” — albeit a relatively small one compared with the $4.4 billion in total revenue reported by Broadridge for the last fiscal year.

“Each time a merger is completed, it seems there are invariably individuals that leave the combined company and start their own niche players that then wind up being the next decade’s buyout candidates,” he also said, predicting — like the other wealth tech experts we interviewed — that fintech consolidation will continue.

“We’re just in the second inning here” when it comes to consolidation, according to Timothy Welsh, president of Nexus Strategy. There will be more M&As “without a doubt,” he said.

What we’re seeing in many cases is that the “big players are trying to control the advisor desktop,” Welsh said. What they want is to gain “more functionality [and] more access to the workflows of an advisor on a daily basis” so they can “make them more sticky, provide convenience and, most importantly, have access to the order entry button,” so they can benefit more from product sales, he said.

“We’re seeing fintech consolidation accelerating due to incumbents looking to add and integrate missing or better capabilities, broaden revenue streams and meet market demand for more capabilities from as few vendors as possible from a vendor management perspective and data and application integration standpoint,” according to Gavin Spitzner, president of Wealth Consulting Partners.

Echoing Broadridge’s Duden, Spitzner said buying small fintech firms often makes more sense for even the industry’s largest players than the alternative. After all, “there are a lot of incumbent providers that have been so busy modernizing their legacy tech stack that it’s easier for them to pick off new capabilities from very focused startups than try to develop it all themselves,” Spitzner said.

Among his clients on both the buy side and sell side, Spitzner said, “there’s a great deal of activity in any fintech capability that drives improved client engagement and helps firms leverage data to a far greater degree,” he pointed out. “There’s also a great deal of interest in AI but it’s still early and there’s more supply than demand in many categories of AI,” he said.

The biggest challenge for AI in the sector, however, is that technology is so reliant on having lots of data and most individual advisors tend to not have a whole lot of data, Nexus Strategy’s Welsh noted.

Trends Colliding

The decision by large firms including Broadridge to seek out fiduciary-focused software companies is also shaped by more recent trends in the wealth management sector, according to Welsh and Joel Bruckenstein, president of Technology Tools for Today.

Advice and guidance solutions are so attractive now because “everything else is a commodity and investment management is free now through robots,” Welsh told ThinkAdvisor. Meanwhile, “there are no commissions anymore” as discounters have shifted recently to commission-free trades, he noted.

Also, “as we move to a more fiduciary environment and as the RIA side of the business grows, it makes sense” for companies in the sector to offer a broader range of products and services in their portfolios, Bruckenstein said, adding Broadridge’s purchase of Fi360 “probably fits with their long-term strategy.”

Meanwhile, fintech consolidation also makes sense because, “to the extent that they can, I think both advisors and broker-dealers would rather, in many cases, deal with fewer firms rather than more firms,” Bruckenstein told ThinkAdvisor. That’s because “there are still some challenges integrating all of these various platforms” in the fintech space, so having to deal with fewer fintech firms’ platforms and technologies “just makes building the tech stack easier,” he explained.

While some of the acquisitions are strategic, some are also finance-related, he said, noting some of the larger companies have “good valuations in the market now, so they have equity shares as currency that they can use” to buy other companies, Bruckenstein said. And because interest rates are low, they can also opt to “borrow money at favorable long-term rates” to do it, so that’s driving at least certain M&A activity, he noted.

Small fintech firms offering financial planning platforms are currently enormously appealing, but also attractive are fintech firms touting “anything that can improve the user experience” of platforms and “make it seamless,” he said.

What Could Spoil the Party

There could be a decline in the number of small fintech firms fielding financial planning solutions for one simple reason, according to Bruckenstein: “I don’t know that there’s a lot of financial planning companies left to be bought.”

There’s one thing, meanwhile, that could at least slow down the rate of consolidation in general: A recession.

“Typically when there’s a recession a couple of things happen,” Bruckenstein pointed out. First, if advisors’ compensation declines as a result of assets under management slipping, they tend to spend less on technology and focus on what they consider to be more essential expenses, he noted.

Meanwhile, some of the newer fintech firms are financed by private equity, so “there could be an impact there as well,” he said.

Another Look Ahead

Noting that there’s been “two different tracks of fintech M&A” so far, Spitzner said, “it will be interesting to see which dominate over the next decade: fintechs acquiring other fintechs and wealth managers themselves acquiring fintechs … so they can own a capability outright and build it out to differentiate for competitive advantage versus renting third-party capabilities.”

Spitzner predicted “we will see more international firms entering the U.S. space and many will certainly employ inorganic growth to jumpstart their efforts.”

The wealth tech experts agreed that the Broadridge purchase of Fi360 makes a whole lot of sense and is a positive for each company.

“Given Broadridge’s aggressive push to expand its reach in wealth management, the natural tie-in on the compliance side and what Fi360 does for it in terms of Reg BI support, it’s a logical buyer,” Spitzner said.