Despite Covid-19 and the uncertainty of the presidential election, financial advisors increasingly used mergers and acquisitions to monetize and grow their businesses last year, and nothing suggests that there will not be more of the same in 2021, an LPL industry executive said.
“This has been building for some time,” said Jeremy Holly, head of advisor financial solutions at LPL Financial. “You’ve got some trends in our industry that suggest this is going to be building over time.”
Holly said deals were getting done in the first quarter before they began to slow down and eventually halted in the second quarter because of the pandemic. That, he said, turned out to be an opportunity for creativity and innovation. “We were able to work with advisors on figuring out how they wanted to structure their deals,” he said.
Holly said because there was a lot of pent up demand, they saw almost a doubling of deals in the second half of the year. It was almost a "100% increase and I think if you look at the RIA space, there was a similar increase,” he said.
According to ECHELON Partners, the strong second half propelled 2020 RIA M&A deal volume to a record-setting 205 transactions, a 1% increase over 2019’s total.
People who were saying they were several years from leaving maybe moved up their timetable because of Covid-19, he said. “You had some folks that said, ‘I don’t want to go through this again. I want to get out now,’” Holly said.
He noted that the industry also has been grappling with an aging advisor population and a limited supply of new entrants into the profession. He further noted that 40% of the industry’s assets are with advisors at or near retirement age.
The industry also saw advisors saying they did not want to sell their entire business, Holly said. “What you saw both inside LPL as well as in the RIA space was taking of chips off the table and actual monetization. You had advisors selling minority stakes, selling part of their books to free up capacity to create capital to reinvest in growth,” he said.
Holly also said there is a trend toward consolidation for scale among broker-dealers, RIAs and advisor practices, where you have more resiliency, safety, capabilities and opportunities for growth. “They want to come together with someone else and build something bigger because there is benefit of scale.” he said.
As advisors look to retire and engage in more consolidations, Holly said the industry will have to prepare for its biggest challenge of not having enough advisors. With wealth on the rise and the demand for advice higher than it has ever been, Holly said the question is, who is going to do the work and how do they do it more efficiently and more productively with fewer advisors.
Technology, he said, will play a key role in supporting demand, which is why the industry has been beefing up its technology. “You see robos having their day in the sun,” he said, noting that they are entering the wealth management space and trying to figure out how they can take part in this trend.
Broker-dealers can play a key role in supporting advisors by “taking stuff off their plate,” Holly said. “We want to provide them with technology so they can create efficiencies in their workflows and day-to-day business. We want advisors only working with their clients and working on bringing in new business,” he said.
Holly believes the trends will continue in 2021, with a lot of interest in growing through acquisitions. “You are going to see valuations stay high and maybe even pick up,” he said. Also, the concept of taking chips off the table, de-risking a little bit, will continue to catch on as people realize the benefits of partial monetization, he said.
One other thing to watch in 2021 is virtual operations, Holly said. “Being able to do virtual due diligence to getting a deal done without actually having met the advisor in person to doing video chats and things like that is going to create some confidence for advisors in their ability to look beyond their markets for acquisition opportunities,” he said.