Despite a strong start to 2020, M&A activity has slowed, as market volatility and the COVID-19 pandemic unfolded in March, Fidelity reports in its quarterly M&A review.
According to the firm’s April 2020 M&A Transaction Report,M&A activity among Registered Investment Advisors (RIAs) and Independent Broker-Dealers (IBDs) started off with 20 RIA transactions in the first two months of the year, representing $28.7 billion in client assets and exceeding AUM totals for all of the first quarter 2019. “Activity was largely driven by high valuations, competitive investment capital, and a desire to scale technology and operating platforms, as well as develop specialized client service capabilities,” the report observes.
But as market volatility and the COVID-19 pandemic escalated and redirected the attention of most sellers and buyers, M&A activity slowed in both transaction frequency and size. In April 2020, there were three RIA transactions representing $1.4 billion in client assets and one BD acquisition by LPL Financial representing $1.5 billion. Fidelity notes that March and April together had the lowest RIA AUM total ($2.6 billion) for two consecutive months since it began tracking the activity in 2016.
Additionally, Fidelity notes that the Federal Reserve’s move to zero interest rates has put pressure on firms with interest-sensitive revenue streams and challenges their ability to pursue capital-intensive transactions. All in all, 23 RIA transactions totaling $29.9 billion in AUM were announced during the first quarter, which is down 26% in the number of transactions, but up 35% in client assets, compared to the first quarter of 2019, the report shows.
Eight of those transactions represented over $1 billion in client assets each, including acquisitions by Cerity Partners, Fiduciary Trust, CAPTRUST and Wealth Enhancement Group. “The scale of the transactions and the buyers involved show that, prior to March, M&A activity continued to follow 2019 patterns where well-capitalized serial acquirers purchased considerably sized firms,” Fidelity says.
Meanwhile, there were no broker-dealer transactions during the quarter, but Blucora—parent company of Avantax Wealth Management and 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, the report notes.
“Transactions like these reveal how consolidation is contributing to emerging business models that span both independent wealth channels,” Fidelity states, further observing that, “Buyers may emerge from this period of volatility in a stronger position to negotiate transactions and, as a result, become more selective in the quality of firms they seek.”
The report further notes that buyers may also balance risk by reducing the upfront cash and equity they are willing to provide, while firms looking to sell could counterbalance these shifts by focusing on refining their competitive advantages, be it through specialized talent, geographic presence or an efficient operating platform.
“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, and firms can remain competitive by evaluating their position in the market and energizing around the unique value they can offer,” Fidelity concludes.
Advisor Group Realignment
On the same day Fidelity’s report was released, the Advisor Group announced that it will undergo an organizational realignment. As part of this, Investacorp, Securities Service Network (SSN) and KMS Financial Services will be integrated into Securities America under a process that “emphasizes continuity of service and minimal administrative burden for financial professionals,” the firm notes.
Advisor Group notes that no repapering of client securities accounts will be needed for financial professionals at Investacorp, SSN and KMS, while a small number of advisor accounts at KMS will require positive consent to the change of firms.
Subject to regulatory approval, the announcement explains that each of the three Ladenburg firms being combined with Securities America will transition in stages, beginning with Investacorp in mid-July, followed by SSN in mid-September and KMS in November. It was only last November that Ladenburg agreed to be acquired by Advisor Group through a transaction valued at $1.3 billion.
Upon conclusion of this realignment, expected by the fourth quarter of this year, both Securities America and Triad Advisors will remain stand-alone firms, alongside the pre-existing Advisor Group firms FSC Securities Corporation, Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services.
No further integration of BD and RIA member firms within the Advisor Group network as a result of the Ladenburg merger is anticipated, the announcement further states.
