Even As Industry Consolidates, Breakaways Remain Common

Echelon Partners has published its 2020 advisory and wealth management industry merger and acquisition (M&A) summary report, stating in no uncertain terms that the year will be remembered as “the most remarkable period of M&A in the industry’s history to date.”

As the Echelon report shows, M&A activity reached a new all-time high in 2020, marking the eighth consecutive year that the number of deals in the industry increased. The report calls this an incredible accomplishment, given the record levels of market volatility experienced and the challenges presented by the ongoing coronavirus pandemic. Also incredible is the fact that all the early signs suggest 2021 will be another banner year, and another record could potentially be set, as the likes of SageView Advisory Group and Compass Financial Partners have already found new homes this year.

One often overlooked theme included in the Echelon report is the fact that breakaway activity remains strong in this industry, even as so much emphasis is given to the strategic M&A action. The report describes “breakaway” activity as “a relatively underappreciated phenomenon that increased in prevalence over the past decade.”

A breakaway occurs when a financial professional (or group of professionals) working for a national wirehouse or an established regional broker/dealer (B/D) “breaks away” from their platform provider to instead either join a more suitable existing firm or to form their own registered investment adviser (RIA) registered with the Securities and Exchange Commission (SEC).

“While RIAs are becoming a relatively more attractive destination for all types of advisers to migrate to, some RIAs are not doing a very good job of aligning the contributions of their most valuable employees with the rewards provided,” the report suggests. “This is causing an increasing number of partner-worthy professionals to leave the RIAs they helped grow in order to join a ‘Newco’ or other established RIA that shares more equity, profits and governance with them than their former employer did.”

The Echelon report cites the “slow to change” profile of some RIA owners as a good reason to expect breakaways to continue increasing and to become a larger part of overall trends in the foreseeable future. That said, breakaway activity declined about 20% last year compared with the record-setting 2019, at least partly due to the fact that economic uncertainty caused advisers to be wary of changing platforms or launching new ones.

“Interestingly, while overall breakaway activity slowed substantially from its record 2019 pace, the number of $1 billion-plus breakaways skyrocketed to 33 throughout the course of the year, once again demonstrating the effects that the COVID-19 crisis had on smaller advisers but not necessarily on larger, more established teams,” the report explains. “These larger advisers remained interested in seeking the platforms that provide them with the best financial opportunity, despite the financial market volatility and economic uncertainty.”

According to Echelon, these figures also underscore the sophistication of many breakaway professionals and their interest in partners that can provide resources to accelerate growth and improve operational efficiencies. Naturally, they are also interested in delivering improved client experiences and rewarding their staff with equity.

The Echelon report goes into substantial depth regarding the origin points and destinations of breakaway advisers, identifying some key trends. Broadly speaking, departures from those firms that saw the greatest number of breakaways from within their ranks demonstrate the continued trend of advisers leaving large wirehouses in favor of fee-only independent RIAs or hybrid firms.

Looking to 2021 and beyond, the report concludes that wealth managers, asset managers and retirement providers will continue to reinvent their business models and offerings.

“M&A will play a major role in creating scale, as well as operational and economic efficiencies,” the report concludes. “In addition, as more of these firms look to rely on artificial intelligence (AI)-based and algorithmic approaches to money management, business development and client service, they will be forced to build or buy innovative technology platforms. We believe that the acquisition of leading technology platforms will accelerate in 2021 as wealth managers, asset managers and retirement providers look to quickly differentiate in increasingly competitive markets.”