The steady increase in merger and acquisition activity in the registered investment advisory space over the past six years might seem impressive to some, but for industry players like Ron Carson, the party is just getting started.
"I used to say, we're at the first pitch of the first inning, regarding consolidation in the RIA space, but now I believe it's more like the game hasn't even started yet," said Mr. Carson, founder and CEO of Carson Group, an $8.4 billion firm that has made mergers and acquisitions a foundation of its growth strategy.
"In seven years or less, you will see a third less firms than we have today in this industry," he said.
Mr. Carson, who says he has 17 acquisition deals in the works, is not alone in his view of a rapidly consolidating financial planning industry. While an aging adviser population looking for an exit strategy is still believed to be one driver of M&A, experts say the desire for economies of scale and the availability of capital from private equity are also major factors. And although the rise and fall of the stock market will continue to affect M&A activity, few believe that it will have any long-lasting effect on the trend toward consolidation.
One reason is because so little consolidation of the industry has taken place.
"Despite the record-level M&A activity, there's still not a lot happening given the size of the industry," said David DeVoe, managing director at the investment bank DeVoe & Co.
In some ways, tracking M&A activity in the RIA space is more art than science, because most of the deals involve privately owned firms, and the data collectors each have their unique criteria for calculating market activity.
But regardless of how the data are measured, the trends illustrate steady M&A growth.
Mr. DeVoe's calculations of RIAs registered with the Securities and Exchange Commission with at least $100 million under management count 97 acquisitions last year out of 5,000 SEC-registered RIAs.
That total is up from 89 in 2017 and 36 deals in 2013, but is still just scratching the surface of pent up deal potential, according to Mr. DeVoe.
Deals are not only becoming more plentiful, they also are getting bigger.
Mr. DeVoe reports that $513 billion in assets under management changed hands last year.
The 10 largest transactions in 2018 constituted $391 billion in AUM, which was nearly 24% more than the $316 billion top 10 total of 2017, and more than five times the $69 billion top 10 total of 2016.
'Flood gates will open'
Despite all of the rosy numbers, Mr. DeVoe said M&A activity is still relatively small.
"We know the demographics for financial advisers are skewed toward the older end, and right now we're not seeing enough deal volume to just clear the retirement dynamic of this industry," Mr. DeVoe said. "We should be seeing 200 to 250 advisers selling their firms annually just for succession, and I think the flood gates will open over the next five-plus years."
The reasons for M&A activity have changed over the years.
"It used to be the vast majority of deals were done because somebody was exiting the industry, but over the past few years we're seeing more deals done to achieve scale and for strategic reasons beyond succession planning," Mr. DeVoe said.
A subdriver of M&A activity is the growing influence of private-equity investors that is fueling deal activity by taking ownership stakes in major consolidator firms like Carson Group, Mercer Advisors, Focus Financial and HighTower Advisors.
"Private equity has helped to accelerate the pace of consolidation, but it didn't create consolidation in the RIA space," said David Barton, vice chairman at Mercer Advisors, a $15 billion, PE-backed firm that made eight acquisitions in each of the past two years and has completed two deals already this year.
"It's a competition issue," he said. "Smaller firms realize the larger firms can offer more services in addition to investment management and financial planning, so for them it's 'build it or join it.'"
While Mr. Carson and Mr. Barton cite the benefits of PE support, the flip side is seen as sometimes short-term and overly aggressive money.
"Private equity in many cases is not patient money," said Tom Haught, founder of Sequoia Financial Group, a $5 billion firm that has made three acquisitions in the past two years without the help of PE money.
Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions, believes the stock market is playing a part keeping a certain amount of M&A activity at bay.
"I don't think there's enough activity yet," he said. "I think a lot of owners still like what they're doing, but there are dynamics that could change. Look at the [independent broker-dealer] world where they are not as valuable as they used to be."
Mr. Slater recalls the peak-valuation period of 2007 leading into the financial crisis and thinks some advisory firm owners could be at risk of riding the seller's market a little too long.
Even though it might be easier to postpone succession planning when the equity markets are strong, Mr. Slater said evidence of the market's influence on deal activity popped up briefly during the 20% market correction at the end of last year.
"I do think we appear to be potentially at a time of peak valuations, and market volatility could drive more discussions," he said. "A good example is during the volatility of last year, more advisers were having more serious conversations about selling."
The main reason the bull market for stocks has driven up RIA valuations and put sellers in the driver's seat is that most advisory firm revenues are based on AUM.
A stock market pullback is seen as a potential disruptor to the pace of M&A activity, even if it's a temporary one.
"I think sellers can and have commanded better deals and better terms, and the stock market cycle has everything to do with it," said Peter Raimondi, an industry veteran who recently founded Dakota Wealth Management, a $700 million firm that has made three acquisitions in its first eight months.
Tables will turn
A down market cycle for stocks, he added, is where the tables will turn in favor of the buyers.
"You have RIAs who have not experienced what it's like to have profits disappear for any period of time," Mr. Raimondi said. "A bear market will shift this to a buyer's market because the RIAs will feel like they have to sell."
Kurt Miscinski, president and chief executive of Cerity Partners, believes a stock market slowdown could slow the pace of M&A activity, but he doesn't believe the larger trend is going away.
Cerity Partners is a $10 billion PE-backed firm that has made seven deals in the past 10 years.
"Acquisitions are a great way to bring together advisers and clients, and develop a geographic presence," he said. "We will continue to make acquisitions."
Good times or bad, a major consolidation driver will continue to be the pursuit of scale, according to Rush Benton, senior director of strategic wealth at Captrust, a $315 billion firm that he describes as "active as hell" in acquisitions.
"The sellers want to benefit from the scale of better technology, better senior management and better back-office support," he said, emphasizing that even succession-plan acquisitions typically involve the seller sticking around for three to five years after the deal is complete.
Mr. Benton also believes sellers are at least partially motivated by the fear of missing an opportunity to be a part of something bigger.
"If you don't get on the train, there's an opportunity cost," he said. "And there didn't used to be trains to get on, the way there are today."
As more mega firms form and continue to expand, Mr. Benton still sees a place for the sole proprietor RIA or even small regional firm, but the challenges will be greater.
"There's definitely some fear of being a small hardware store and having a Home Depot open across the street," he said. "The bigger you get as an industry the more you become a real business, and Home Depots happen in real businesses."
Carolyn Armitage, managing director at the investment bank Echelon Partners, fully appreciates the drivers toward size and scale in the RIA space, but said "boutique firms can still have a terrific niche, and I don't see them going away."