Many financial advisors expect consolidation and M&A activity in the RIA space to increase in the next 12 months and more expect M&A to have a positive impact on their practices, according to Nationwide’s 7th annual Advisor Authority study.
The survey of nearly 2,500 advisors, financial professionals and individual investors also finds that as stock market valuations rebounded from last year, more advisors and financial professionals are looking to monetize their practices in the year ahead, while others look to make their practices stronger.
In fact, large majorities of RIAs and fee-based financial professionals (73%), wirehouse financial professionals (74%) and BD financial professionals (65%) say that consolidation and M&A in the RIA industry will increase. Expectations for deal flow are substantially higher than last year, with RIAs and fee-based financial professionals up 14 points (from 59% to 73%), wirehouse financial professionals up nine points (from 65% to 74%) and broker-dealer financial professionals up five points (from 60% to 65%).
The expectation that M&A activity will have a positive impact on businesses in the next 12 months is also substantially higher than last year, rising 16 points (from 39% to 55%) among RIAs and fee-based financial professionals, 20 points (from 48% to 68%) for wirehouse professionals, and 13 points (from 39% to 52%) for broker dealers.
For successful advisors and financial professionals who expect a positive impact on their business from M&A, the top three reasons are:
- increased opportunities to sell their business (37%);
- greater resources to serve their clients (36%); and
- allowing them to provide ongoing employment for existing employees (34%).
“Our seventh annual Advisor Authority study makes it crystal clear that RIAs and financial professionals in the wirehouse and broker-dealer channels are more bullish about M&A than we’ve seen in years,” says Craig Hawley, Head of Nationwide Annuity Distribution. “Valuations are rising as markets hit new highs and private equity gets in on the game, meaning some advisors and financial professionals are more than ready to monetize their practice.”
Hawley adds that they are also seeing a spike in consolidations as others are ready to make their practice stronger, in light of the need for scale, the impact of fee compression, and as technology and compliance costs hit firms hard, especially the smallest.
Selling Opportunities
Among those who expect M&A to have a positive impact on their business, Nationwide notes, 2021 is the first year of their study that RIAs and fee-based financial professionals say increased opportunities to sell their business is one of the leading benefits of M&A.
RIAs and fee-based financial professionals who cite increased selling opportunities as the top benefit of M&A are up 13 percentage points from last year and much higher than prior years. This is also the first year that wirehouse professionals cite increased opportunities to sell their business as the leading benefit of M&A. For broker-dealers, increased opportunities to sell their business is second most important benefit of M&A, up 10 percentage points from last year and substantially higher than previous years.
Succession Planning
After a year of dealing with the unknowns of the pandemic, more advisors and financial professionals have a succession plan in place (77% in 2021, up from 73% in 2020).
For many, M&A is part of an effective means of succession planning, the study notes. In fact, among RIAs and fee-based financial professionals who expect M&A to have a positive impact on their business, the second most important benefit is allowing them to create a succession plan—up 7 points from last year to 34% in 2021. Similar results were seen among wirehouse professionals, but for broker-dealers, creating a succession plan was tied for the fourth most important benefit of M&A. It was also up 7 percentage points from last year, rising to 32%.
Scaling up
For broker-dealers, greater resources to expand and scale their business is the leading benefit of M&A this year, and has been consistently among the top two benefits in prior years as well.
Among RIAs and fee-based financial professionals who expect M&A to have a positive impact on their business, greater resources to expand and scale their business is tied for the third most important benefit of M&A. This was up slightly from most prior years, except for 2018, when it was the second most important, the study notes.
In contrast, wirehouse professionals say that greater resources to expand and scale their business is not among their top three benefits of M&A, and this factor has declined in importance since 2018.
Buying Opportunities
While more advisors and financial professionals see M&A as a way to exit the industry, others say it creates buying opportunities. For RIAs and fee-based financial professionals who have a positive sentiment about M&A, increased opportunities to buy another practice is the third most important benefit, tied with expanding and scaling their business.
Increased buying opportunities is not cited as a top three benefit among wirehouse professionals, although it has risen in importance since 2019. In contrast, for broker-dealers, increased buying opportunities is tied as the second most important benefit of M&A, increasing steadily year over year, the study notes.
Competition and Price Compression
A small number of all advisors and financial professionals (13%) say consolidation and M&A activity in the RIA industry will have a negative impact on their businesses in the next 12 months. Among the most common concerns are pricing compression and increased competition. Making it harder to compete as a small independent firm was cited by RIAs (39%) and broker-dealers (37%) as a top concern, while pressure to sell products that might not be right for their clients was cited by wirehouse (35%) and broker-dealers (37%).
The online survey was conducted by The Harris Poll from July 22 to Aug. 17, 2021, among 1,632 advisors and financial professionals and 839 investors.
