It may feel like decades, but it was just a few months ago when it seemed as if nothing could stop the tide of RIA merger and acquisition activity sweeping the wealth management industry. It looked as though deals would keep coming and valuations would continue their steep rise.
How quickly things change. As equity markets took a beating in March from the rapid spread of COVID-19, the pace of M&A deals have tailed off, according to recent first-quarter reports by Echelon Partners and Fidelity Clearing & Custody Solutions. The slowdown has prompted fears in some corners of the industry that the deal-happy days that culminated in a record number of transactions in 2019 have come to an end.
Yet there are strong arguments to be made that M&A transactions can regain the pace they saw as the year began, and that deal-making will intensify once the worst of the pandemic is behind us. In other words, there’s a likelihood deals will pick up again sooner than most might think — not despite public markets’ lurching response to coronavirus, but because of it.
More urgency for aging advisers
The first reason is that the fundamentals of the business will still be strong, and the factors that drove high transaction activity prior to the coronavirus outbreak will remain. For one, financial advisers with five to 10 more years before retirement will continue to look for ways to exit their businesses and reap the fruits of their years of labor.
If anything, the volatility of the past several weeks may serve as an abrupt reality check for those older advisers who may not have the stomach for the ups and downs of the current environment. These advisers likely survived the Great Recession and thought (wrongly, as it turns out) that such a disastrous downturn would only come once in a lifetime.
Now these advisers, who in a pandemic-free alternate timeline may have been content to bide their time to get the highest valuation, are considering whether it might be wiser to get out of the financial advisory game, thus fueling higher transaction volume as they rush for the exits.
Stimulus could charge markets
Though still moving in fits and starts, equity markets seem to have taken a general upward trajectory since the CARES Act was passed on March 27, pumping $2 trillion in stimulus funds into the economy.
It’s possible that, with the help of the latest stimulus package and others that will surely come after it, that equity markets will recover faster and to a greater degree than even the most optimistic pundits predict.
This could create a window in which valuations are too attractive for advisers to turn down, particularly for those already spooked by stocks’ tumble in March and fearful of future volatility.
Debt still cheap
On the demand side of the equation, the Federal Reserve in the months leading to the pandemic had been incrementally raising the interest rate banks charge to borrow from each other. No more — the Fed slashed the rate to zero in March as the economic ramifications of the coronavirus for the U.S. economy came into sharp relief.
With the economy likely to struggle for the foreseeable future, it’s more than likely that we’ll stay in the same low- or zero-interest-rate environment that provided oxygen for the RIA transaction fire in the first place.
Don’t count M&A out
To be clear, there are still more questions than answers when it comes to predicting which way RIA M&A activity will go in coming months and years as the world weathers the COVID-19 pandemic and starts on the long road to recovery.
That said, we shouldn’t be surprised if deal volume starts increasing at some point. The market downturn of recent weeks may have hurt some valuations, but many of the other factors that fueled deal-making through the end of the 2019 aren’t going anywhere. The bottom line: It’s too soon to say the RIA M&A frenzy is over.
Larry Roth is founder and managing partner ofa wealth management industry-focused strategic consultancy and M&A advisory firm affiliated with Berkshire Global Advisors.