Views of Adviser M&A Have Evolved

Nationwide has published the seventh edition of its Advisor Authority study, finding registered investment advisers (RIAs) and financial professionals in the wirehouse and broker/dealer channels have grown even more bullish about merger and acquisition (M&A) activity over the past year.

Simply put, more advisors and financial professionals are looking to monetize their practices in the years ahead, with some looking to make their practices stronger through strategic and/or serial acquisitions. Overall, about two-thirds of financial professionals expect consolidation and M&A activity in the industry to increase in the next 12 months.

Notably, this year’s survey shows more respondents expect M&A to have a positive impact on their practices—54% in 2021 compared with 42% in 2020.

“Our study makes it crystal clear that RIAs and financial professionals in the wirehouse and broker/dealer channels are more bullish about M&A than we’ve seen in years,” says Craig Hawley, head of Nationwide annuity distribution. “Valuations are rising as markets hit new highs and private equity gets in on the game, meaning some advisers and financial professionals are more than ready to monetize their practice.”

According to Advisor Authority, roughly three-fourths of RIAs and fee-based financial professionals (73%), nearly three-fourths of wirehouse financial professionals (74%) and roughly two-thirds of broker/dealer financial professionals (65%) say that consolidation and M&A in their industry will increase. Expectations for deal flow are substantially higher than last year, up 14 points (73% vs. 59%) for RIAs and fee-based financial professionals, up nine points (74% vs. 65%) for wirehouse financial professionals and up five points (65% vs. 60%) for broker-dealer financial professionals.

The study also cites what have become very familiar factors as the main drivers of consolidation, including the need for scale, the impact of fee compression, the price tag for maintaining/improving technology and the cost of compliance. These competitive pressures hit all firms hard, according to Nationwide’s analysis, especially the smallest.

Positive Impacts Expected from M&As

The majority of advisers and financial professionals expect M&A activity to positively impact their businesses in the next 12 months. Nationwide says this is substantially higher than last year, up 16 points (55% vs. 39%) for RIAs and fee-based financial professionals, up 20 points (68% vs. 48%) for wirehouse financial professionals, and up 13 points (52% vs. 39%) for broker/dealer financial professionals. 

Hawley notes that, among those who expect M&A to have a positive impact on their business, 2021 is the first year of the study in which RIAs and fee-based financial professionals say “increased opportunities to sell their business” is one of the leading benefits of M&A. Specifically, the number of RIAs and fee-based financial professionals who cite increased selling opportunities as the top benefit of M&A is up 13 percentage points from last year, a figure Nationwide calls “much higher than prior years.” For context, this figure was measured at 35% in 2021, 22% in 2020, 29% in 2019, 29% in 2018 and 20% in 2017.

According to Nationwide, this is also the first year that wirehouse financial professionals cite increased opportunities to sell their business as the leading benefit of M&A, up 13 percentage points from last year and higher than previous years, at 38%. This compares with 25% in 2020, 32% in 2019 and 23% in 2018.

Among RIAs and fee-based financial professionals who expect M&A to have a positive impact on their business, “greater resources to serve their clients” has been selected as a top benefit of M&A every year of the study, with the exception of last year, when it tied for the second most important benefit. Likewise, among wirehouse financial professionals, greater resources to serve clients has also been selected the top benefit of M&A every year, with the exception of this year, when it was the third most important. For their part, broker/dealer financial professionals selected it as the third-most important factor this year, down from the most important benefit last year.

Year over year, Nationwide’s Advisor Authority has shown that the most successful advisers and financial professionals—defined as those who earn more than $500,000 or individually have total assets under management (AUM) of $250 million or more—are consistently more bullish about M&A than all other advisers and financial professionals. They are also more optimistic about the benefits to their firm, as nearly two-thirds of successful advisers and financial professionals (63%) say M&A activity will positively impact their businesses in the next 12 months, as compared to roughly half of all other advisers and financial professionals (51%).

Successful advisers and financial professionals who expect a positive impact on their business from M&A say the top three reasons include increased opportunities to sell their business (37%), greater resources to serve their clients (36%) and ability to provide ongoing employment for existing employees (34%).

Some M&A Concerns

On the other side of the balance, a small number of advisers and financial professionals (13%) say consolidation and M&A activity in the RIA industry will most likely negatively impact their businesses in the next 12 months. In particular, 11% of RIAs and fee-based financial professionals, 9% of wirehouse financial professionals and 15% of broker/dealer financial professionals expect M&A to negatively impact their business.

Among the three most common concerns of those who expect M&A to have a negative business impact, pricing compression is most frequently cited by RIAs and fee-based financial professionals (40%), wirehouse financial professionals (37%) and broker-dealer financial professionals (38%). Increased competition is also cited as a top three concern by RIAs and fee-based professionals (37%), wirehouse professionals (39%) and broker-dealer professionals (40%). Making it harder to compete as a small independent firm is cited by RIAs (39%) and broker-dealers (37%), while pressure to sell products that might not be right for their clients is cited by wirehouse financial professionals (35%) and broker-dealers (37%).