Some of the themes affecting advisors in 2024 started years earlier: M&A continued at a fast pace; actively managed ETFs are gobbling up market share; and major regulations remain stuck in an exhausting back-and-forth political exercise. These themes are worth reflecting on, as they will likely continue in 2025.
Through November there were a total of 207 transactions for RIAs and independent broker-dealers, data from Fidelity show. That’s the exact figure across the same timeframe in 2023 – and while the year might not reach the record of 230 mergers and acquisitions set in 2022, it still shows an immense appetite for buying firms.
“It’s so close – it’s still very solid volume,” said Laura Delaney, vice president and senior business consultant at Fidelity Institutional.
The size of deals is changing, however. While nearly 40 percent of transactions in 2021 included more than $1 billion in purchased assets, that fell in 2022, due to market volatility, according to Fidelity. Now, “we’re starting to see a nice comeback – 37 percent of deals are over $1 billion in purchased assets,” Delaney said.
It’s a highly competitive market for buyers. And sellers are getting higher valuations. Last year, the median was about nine times earnings before interest, tax, depreciation, and amortization (EBITDA). Earlier this year, investment bankers said it went up to 9.6 times EBITDA, and now the figure is closer to 10 times, Delaney said.
Behind nearly all the demand is private equity. PE backers are increasingly interested in RIAs because of the lucrative business model and potential for growth. Evidencing that, every deal Fidelity recorded in November had PE backing, as was every deal in April.
October, which set a record for M&A volume in any month, at 34 deals and $79 billion in purchased assets, had 79 percent of transactions backed by PE.
Don’t expect that to slow down anytime soon, Delaney said. The fundamentals behind M&A remain: firms have been expanding the services they offer to meet client demand; RIA owners often are burdened by the administrative aspects of running a business; and succession in the industry is an ongoing issue, she said.
“The pace of M&A is going to remain strong.”
If there’s any area in the fund space that just keeps winning, it’s active ETFs. While those products are relatively new compared with their passive peers, they are growing extremely quickly, taking market share most obviously from actively managed mutual funds.
ETFs have long been outselling mutual funds, largely as buyers have come to appreciate the transparency, flexibility, and tax benefits of the vehicle’s structure, said Ryan Jackson, senior manager research analyst for passive funds at Morningstar Research Services.
Through October, US ETFs brought in $807 billion in net sales, while mutual funds saw $297 billion exit, Morningstar Direct data show. Passive ETFs led the way, with $582 billion in net inflows, followed by active ETFs, at $225 billion, and passive mutual funds, at $48 billion. Active mutual funds saw net redemptions of $344 billion.
Asset managers have been bending to that demand, launching products at a breakneck pace this year, bringing 507 active ETFs to the market, including new ones and conversions from existing mutual funds, according to Morningstar. To put that in context, there are a total of about 1,700 active ETFs available.
“There has been this huge groundswell of options in the market to invest in,” Jackson said. “For a while, it was a slow burn to see new funds trickle in.”
While impressive, the 507 new active ETFs figure skews big, in part because fund sponsors have increasingly added so-called buffer ETFs, which come in different vintages, each of which counts as a single ETF, he noted.
Active ETFs have been pulling in money across asset classes, but buffered ETFs and covered-call ETFs have seen demand grow even amid strong market returns, a trend that has surprised analysts, he said.
“They continue to just stack up multi-billion-dollar month after multi-billion-dollar month,” he said.
Another category that’s quickly gaining favor won’t be a surprise to anyone who’s been paying attention to the news: crypto. Earlier this year, the Securities and Exchange Commission began approving spot-price bitcoin ETFs, followed later by spot Ethereum ETFs.
While initial sales were strongly fueled by investors switching from Grayscale’s Bitcoin Trust to a variety of products, most prominently BlackRock’s Bitcoin ETF, that has changed, Jackson said. Sales tapered off but have started picking up again, reaching a record of $8 billion in November.
“There was this huge demand for crypto just waiting in the wings that came about after the election,” Jackson said.
President-elect Donald Trump’s victory in November could change everything for a few major regulations at the SEC and Department of Labor.
“The game plan that was put in place by [SEC] chair Gary Gensler is going to end up being disrupted next year,” said Amy Lynch, president of FrontLine Compliance. Not only is that because Gensler is stepping down at the dawn of the next Trump administration, but also because Commissioner Jaime Lizárraga is also planning to leave the SEC at that time. Additionally, Commissioner Caroline Crenshaw’s term expires at the end of 2024. And while at least two of the three replacements for those commissioners will have to be Democrats, they will be selected by Trump.
“The replacement of the commissioners as well as the chair is definitely going to create a more right-leaning SEC, and that means that they could end up changing some of the current initiatives that are in place,” Lynch said.
At risk is the SEC’s climate-disclosure rule for public companies, which the commission finalized earlier this year, even though major provisions of that rule were walked back in favor of industry stakeholders.
Another change observers expect at the SEC is a more crypto-friendly bias, but how that will play out is unclear, Lynch said.
“Even with a more Republican-leaning commission, it will still be difficult,” she said. “US regulations simply weren’t created for those types of assets.”
There will likely be a reduction in overall rulemaking, though the SEC will still be responsible for protecting investors, she said.
“The reality is not much [will change]. The US regulatory system is pretty much set in stone,” she said. “The worst they can do is nothing.”
Stakes are somewhat high at the DOL, where two major rules are already at risk because of court challenges: the latest iterations of its fiduciary rule and ESG rule.
It’s worth noting that the DOL during the first Trump administration finalized its own versions of those, and it could seek to halt or reverse the Biden-era rules to replace them with iterations that more closely resemble the earlier ones.
The forthcoming Trump DOL could do something similar to what it did in 2018, which is to walk away from defending a lawsuit over the fiduciary rule, said Fred Reish, partner at law firm Faegre Drinker Biddle & Reath.
“They just walked away from it,” Reish said. “The betting odds right now are that the Trump administration will do something similar to that if the Texas federal district court or the Fifth Circuit Court of Appeals rules against the Biden-era fiduciary definition.”
Nonetheless, there is not a particularly high degree of confidence in that, he said.
The Biden-era rules provide additional consumer protections around rollover recommendations, which has not been popular with brokers, particularly those selling insurance products.
Additionally, the Biden-era rule over selecting investments for retirement plans barely mentions ESG – environmental, social, or governance – criteria, but it replaced the earlier Trump version that was widely recognized as having a chilling effect on ESG considerations within retirement plans. The Trump version, unlike the current one, outright forbade the default investment options for 401(k)s, such as target-date funds, from being ESG-centric products.
The next DOL has a few options to change the Biden rule, including publishing guidance that sets a different tone, Reish said.
Regardless, “the trend line affecting advisors is in favor of greater protections for retirement investors,” he said. With more and more people turning 65 and heading toward retirement, the need for rules and regulations that fit either a best-interest or fiduciary standard is apparent, he said.
“To match the investing and withdrawal [needs] is extremely difficult, and the average retiree is not prepared to do that. They need professional help.”
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