After a brief pause in activity at the beginning of the pandemic, mergers and acquisitions in the registered investment advisor space remain on a tear, and the industry is on track to see roughly 200 deals completed by the end of the year, said Phill Rogerson, senior vice president of RIA Wealth Strategy at Envestnet, a financial technology firm.
So what does it mean for smaller advisory firms whose owners may be thinking of selling? And what does that mean for consolidators in the financial advisory sector? Those were just two of the questions addressed during a virtual roundtable held yesterday called “RIA M&A: Today, Tomorrow and Next Year.”
The panelists included Ron Carson of Carson Group, an advisory firm that provides business advice and support to financial advisors; Bob Oros of Hightower Advisors, a company that is active in advisor mergers and acquisitions; Jim Dickson of Sanctuary Wealth, a technology and operations platform for advisors that also provides M&A services; and Carolyn Armitage of Thrivent Advisor Network, which provides its affiliated firms with advice, insurance and banking support.
“Covid has driven a lot of this activity. A group of people out there were thinking of selling, and Covid accelerated that decision,” Ron Carson said about the pace of deal making. “People realized you’re either going to be the disruptor or you’re going to be the disrupted. There is no middle ground. This group we call the ‘rich and tired.’ They’ve been in the business a long time but don’t necessarily have the energy to do what’s necessary, to get the scale to be competitive.”
While 200 deals by year’s end may sound like a lot, there are actually a lot more businesses coming down the pipeline one way or another, Carson said. “We have a lot of people out there that haven’t been doing anything, but with the pace of change, they’re now thinking, ‘I have to add depth and scale to my business, or I need to sell or partner.’”
That pipeline is so strong that, as strong as it’s been to date, “in about two years this is going to explode,” Dickson added. “There are a lot of advisors over 60 at the end of a bull market. They’re going to be thinking it’s time to hand the keys over. The question is how prepared are they? A lot of people aren’t prepared, but Covid has them thinking they have to figure it out now.”
For advisors in the position to sell, the best thing they can do is prepare themselves, and not just for the sale. Even excellent financial advisors who are used to running their own show may expect that their experience will somehow translate over to the M&A world. “But it doesn’t really translate,” Armitage said. “So whether they’re trying to buy a firm to grow and compete or sell a firm, the deck is really stacked against them. Most will focus on the dollar amount of the deal but not pay attention to the structure or the terms.”
The more challenging aspect for retiring advisors is the emotional roller coaster that goes with selling what, for many, has been an important part of an identity, she continued. “It’s really disappointing how [few] financial planners have really thought about retirement beyond funding it, or put together a succession plan,” she said. “I find a lot of advisors are afraid of retirement and what that means in terms of what they’ll do with their time and their impact on the world. What’s the vision for their 2.0? They really need to work through the emotional aspects before getting to the financial ones.”
As unpleasant as that might seem, it may be a lot more pleasant than the alternative. After 12 years of bull market grace, a lot of investors have forgotten the pain of a significant correction. And advisors who have delivered close to nothing but good news for a decade may suddenly dislike the sea change that is bound to come.
“How many uncomfortable meetings with clients will it take?” Carson queried. “They’re going to want to get out.”