A rapid growth in the number of RIA mergers and acquisitions is proving to be a positive trend for the financial industry, according to Scott Slater, M&A specialist and Fidelity Institutional vice president of practice management & consulting.
Although some of the recent activity has been caused by the backlog of deals that were in the works in the spring and put on hold, much of the growth is a natural increase in the desire to consolidate, Slater said in an interview.
June marked the beginning of the rebound from a three-month slowdown in M&A that was driven by the onset of the coronavirus pandemic, Fidelity said, but the activity has picked up again. During the third quarter, the RIA channel had 37 transactions representing $48 billion, the highest total transactions and assets for any quarter since Fidelity began tracking in 2016, according to the Fidelity Third Quarter M&A Report released today.
The third quarter had a record 15 deals involving $1 billion or more, which broke the previous record of 10 deals in the fourth quarter of 2019.
Fidelity noted in the report that despite the steep drop in activity from March to May, year-to-date totals are only down 12% in transactions and 11% in AUM from record-breaking 2019, and indications are that this strong pace will continue through the end of 2020.
“The capital is definitely out there for M&As and the fundamentals of the industry are strong,” Slater said.
A trend that has emerged in the recent deals is for investors to buy only a minority share of a firm, so the buyers have a stake in the firm but cannot direct its activities, Slater said. “Minority investments enables firms to have different forms of partnerships,” he said.
“Minority investments are allowing private equity firms and other capital providers to create new operating models and equity ownership structures, which will continue to shape the industry,” Fidelity said.
The move to larger entities allows firms to provide expertise in a number of niches. “Firms are investing in stronger technology platforms and in the people they need in order to do more than just financial planning,” Slater said. “The financial industry of today demands specialization,” which requires staff.
There will still be room for smaller RIAs. “This is still a highly fragmented industry,” Slater said. Small RIAs can take advantage of third-party providers for the technological and operational support they need, he said, adding that their success will depend on how they utilize the resources.