In only the first month of 2021, a stunning number of RIA M&A transactions were announced, creating a headline frenzy of deal news. We here at Mercer Advisors were a big contributor to these volumes by announcing seven transactions of our own this month, for a total of 43 acquisitions since 2016.

As a result, many in the industry are wondering what is at play here and can these volumes sustain themselves through the rest of 2021 and beyond? From our perspective as an active participant, many of these deals were actually completed in late 2020 to avoid potential negative tax law changes under a different presidential administration.

Regardless, deal pipelines across the industry are bursting at the seams, driven by demographics as founding principals age into their retirement years, and also due to structural industry issues that continue to contribute to advisors needing to make strategic decisions for the future of their careers and their businesses.

What we are finding is that sellers are falling into three distinct camps: 1) growth-minded advisors that want out of the back-office complexities, which are limiting their capacity to expand: 2); older advisors who want to continue in their careers, but also want to shed the back office, compliance and HR issues that are diminishing their job satisfaction; and 3) retiring advisors that want to exit their businesses completely.

While that last cohort has not been a significant factor in the recent past, it has started to increase in volume. However, based on current trends, the operational, regulatory, technology and personnel issues that all RIAs are facing are only going to become larger, more complex and costly to manage. These issues are becoming the number one business challenge that advisors are actively considering as they make their future strategic plans.

Ultimately, what these deals are telling us is that for a majority of the industry, regardless of size or where they are in their lifecycle, most are in need of a well-resourced partner that can provide a better client experience, more services, operational excellence, and a growth engine while creating a career path for their loyal staffs and a more client-focused future for themselves. The business of wealth management is simply becoming too complex, competitive and challenging.

A great quote from one of our new recent partners, Tim Rowland of Rowland Carmichael Advisors, an $850mm AUM RIA in Arizona, exemplifies this, “While we have a strong team and great next generation talent and leadership, we realized that we needed to find a like-minded partner that could not only provide a business continuity plan for us, our clients, and staff, but also help us scale and leverage our operation.”

Many firms are facing similar circumstances as Rowland Carmichael and are at an inflection point as to whether they double down on the investment in their firm to get to that next level, adding even more challenges to address with difficult operational and technology decisions to make, longer work weeks with more anxious late-night hours, as well as significant financial risk; or partnering with a firm that already has scale, a similar culture, a strong brand, and an in-demand service model.  "It was the choice of building it or joining it, and we chose to join it," David Carmichael of Rowland Carmichael told us.

Other themes we are seeing that are driving deal volumes are from older advisors who don’t want to exit just yet, they simply want out of their cumbersome back office responsibilities. Carl Mahler of Pinnacle Wealth, a $365 million AUM RIA in Virginia noted that, “In reviewing our succession plan and the evolving wealth management industry, it became clear to us that we needed to partner with a strong national firm that would not only assist with the provisioning of middle and back office responsibilities, but also help us grow while sharing our commitment of putting clients’ needs first.” These types of comments have become more and more typical as to the motivations for this group of sellers.

Additional concerns for sellers of all types continue to be focused on their potential partner.  Does the buyer enhance the client value proposition? The status quo isn’t good enough for most firms to meet increasing client demands—clients are looking for more services, and preferably at lower cost. Sellers also want to know that buyers will be able to help them grow so that they can continue to expand their business, as well as agreeing to retain the seller’s staff and provide them with career development opportunities as well. Accordingly, the buyer has to have a stellar reputation and not be a financial engineer seeking to lay people off. Clients want to know that they are going to still be working with “their” Advisor and team.

Older selling shareholders are also typically not looking for an exit strategy (although that cohort as mentioned earlier has been increasing lately). These advisors still want to work for two to five more years after the sale and want to offload back-office responsibilities in order to do more of the things they love, whether that be client service or business development.

A good M&A buyer also has to be a “master problem solver.” Every deal has a score of big issues the buyer must solve. Examples of this include how a seller pays their advisors. Every firm handles advisor compensation differently and seller advisors are not willing to go backward in compensation. The question a “good buyer” has to solve is how is the advisor going to be paid at the new entity, and how can they earn more than they are making today?

A good buyer not only does deep due diligence on the seller, but more and more seller firms are doing reverse due diligence on the buyer. This has accelerated during Covid as in-person meetings have dried up and people must rely on Zoom calls — “trust, but verify” is the order of the day. Sellers now routinely call firms and the people that have joined that firm and ask them their raw, unfiltered opinion of how things went. Because of this, a good buyer must stand by their deal terms. You cannot promise the moon and deliver cheese—integrity matters in all aspects of the process.

These are just a few of the key observations we have garnered that are contributing to the increasing volumes that promise to make 2021, yet again, another record year in RIA M&A deal making.

Dave Barton is vice chairman of Mercer Advisors.