Biden tax hike could boost RIA M&A: Rudy Adolf

The looming reality of the Biden administration raising capital gains taxes could only pour gasoline on the already sizzling market of registered investment advisers looking for mergers and acquisitions, according to Rudy Adolf, founder and CEO of Focus Financial Partners Inc.

President Joe Biden is considering a proposal to almost double the capital gains tax rate for wealthy individuals, to 39.6%, to help pay for a raft of social spending that addresses long-standing inequality, according to people familiar with the proposal.

Many in the financial advice industry have said that, in the near term, a looming capital gains tax hike could add urgency to the market and spur some financial advisers to sell their practices to avoid higher taxes.

“This is obviously a very complex question because it has so many facets,” Adolf said Thursday morning during a conference call with analysts to discuss the firm’s first quarter earnings.

“In the short term, clearly, we do believe it will have an accelerating impact on our M&A activity, not dramatically but still meaningfully,” Adolf said. “In so many discussions we are having, quite frankly, this is an important subject.

“Medium term it will turn more into a headwind for the wealth management business,” he said. With a tax hike on capital gains, the government takes a bigger bite of clients' wealth, he said.

“For sure it will have some impact on what we are managing,” Adolf said. “However, this probably is offset by the [clients'] need for high-quality advice.”  

There appears to be no stopping the current RIA M&A craze.

The 76 RIA deals announced during the first three months of 2021 broke a record set in the final three months of last year, when 69 deals were announced. And that fourth-quarter record had eclipsed the record 55 deals in the third quarter, according to Echelon Partners.

Focus Financial reported total revenues over the first quarter of 2021 of $394.2 million, or 16.9% growth year over year. The majority of the growth was driven by higher wealth management fees, which included the effect of mergers completed by partner firms, the company said.