RIAs and advisory firm owners should prepare for a surge in mergers and acquisitions once the economy turns around, according to Fidelity Investments and Echelon Partners, both of which released first-quarter deal-making reports today.

Covid-19 slowed deal making at the end of the first quarter, which started out strong, but the pace of deals should pick up once again, the two firms said.

“Though some firms are taking time to pause and assess the changed market environment, the fundamental forces driving M&A can be expected to return in the months ahead,” the Fidelity report said. “Firms can remain competitive by evaluating their position in the market and energizing around the unique value they can offer.”

The Echelon report added, “Although much has changed in the world, several key dynamics have stayed the same within the RIA deal making economy. Most notably, the aging demographic of advisors and need for transition remains a major driver of current – and future – deal activity and deal values.”

The two firms, and DeVoe & Company, which also reported first-quarter activity today, used different metrics for the firms they counted. Despite coming up with varying totals, all three companies reached the same general conclusions.

Fidelity reported 20 RIA deals completed in the first two months of the quarter, representing $28.7 billion in client assets and exceeding first-quarter AUM totals from a year earlier. As market volatility and the Covid-19 pandemic unfolded in March, M&A activity slowed to only three additional deals completed in March.

The total in deals for the quarter is down 26% in the number of transactions, but up 35% in client assets compared to the first quarter of 2019, Fidelity said. Thirty-five percent of the deals involved more than $1 billion in client assets. The largest RIA transaction was Fiduciary Trust Company’s acquisition of Athena Capital Advisors, with $5.8 billion in client assets.

While there were no broker-dealer transactions during the quarter, Blucora, the parent company of Avantax Wealth Management, a firm that has been active in the IBD space, completed an acquisition of HK Financial Services, a CPA-focused RIA with $4.4 billion in client assets.

Echelon reported 46 transactions, versus 53 in the fourth quarter.

Total deal activity for 2020 is still projected to be strong, although it will fall slightly behind the record-setting deal making that took place in 2019, when 203 transactions were completed, and behind the 220 deals projected for 2020, Echelon said.

Echelon reported deal making activity is also being slowed because of market volatility. The market declines will result in a quarterly decline in revenue for most wealth managers, which will impact their willingness to sell or buy, the firm said. However, appraisers rarely use one quarter in isolation, preferring to look at the trailing four quarters for financial data and related growth rates to assign valuations, Echelon said.

“What matters is the duration of the decline and how that impacts revenue and profits. Some firms thrive and gain share in down markets and others are successful at retaining margins by shedding costs,” Echelon noted.

 

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