RIA M&A: Strong in Q1, but COVID-19 Set to Take a Toll

Fidelity 

On Friday, Fidelity said there were 23 RIA deals in Q1, totaling $29.9 billion in client assets, down 26% in the number of transactions, but up 35% in client assets compared with the year-ago quarter.

Of the deals, 35% were $1 billion-plus, representing 81% of total Q1 AUM. The largest Q1 RIA transaction under Fidelity's system was Fiduciary Trust Co.'s acquisition of Athena Capital Advisors with $5.8 billion in client assets.

February-March Decline

The "breakneck pace" of M&As that started the quarter in January, with 18 transactions for the month, "was followed by a steep drop-off to nine transactions" in February and just seven in March, DeVoe noted.

"Although the emergence of COVID-19 in the period was not the culprit for the slowdown," DeVoe predicted the crisis would "have profound implications on future activity," adding: "RIA businesses of all shapes and sizes will be directly and indirectly affected by this evolving situation."

The "deceleration" from January through March was "just a natural anomaly," according to David DeVoe, managing director and founder of DeVoe & Co. "The ebbs and flows of trend lines" were to blame, he told ThinkAdvisor, stressing it was still a "very strong quarter overall."

However, Fidelity said that after Q1 M&A activity started o­ff strong, with 20 RIA transactions in the first two months of the year, the COVID-19 pandemic and March's market volatility were "reflected in the month's slowed M&A transaction activity."

Just three RIA transactions totaling $1.2 billion were announced in March, the "lowest level of monthly activity since December 2018 and one of the smallest monthly totals since 2016," it said.

Meanwhile, Echelon said that "while deal momentum carried over from 2019 into Q1 2020, the sudden drop in markets and the abrupt slowdown in economic conditions — which began in late February — caused global M&A activity to slow in March."

However, Echelon predicts total 2020 deal activity will be strong. Meanwhile, according to Fidelity, "active buyers and bankers indicate that they expect most already-negotiated deals to be completed, while deals in their earlier stages could see delays throughout this period of volatility."

Fidelity estimated: "Many firms will likely take time to assess market direction, with sellers staying focused on serving clients and buyers focused on evaluating their overall strategy. In the months ahead, buyers may be in a stronger position to negotiate transactions and as a result become more selective in the quality of firms they seek."

COVID-19 Projections

DeVoe & Co. expects there will be four phases for RIA M&As following the coronavirus crisis, including periods in which:

1. Live transactions get completed.
2. There is a lull in activity.
3. There is a surge of activity.
4. We return to some degree of normalcy.

 Although the pandemic and accompanying market decline have been a "shock to the system, which affects the psychology of both buyers and sellers," DeVoe & Co., like Fidelity, said it expected "most transactions that are currently in a later stage of the process will be signed and closed."

However, "many transactions currently in earlier stages of negotiation will likely stall," DeVoe said, predicting that those retreats will contribute to a "noticeable slowdown in M&A activities" during Phase 2.

Despite the expected decrease in signed deals, DeVoe predicted early- and mid-stage M&A activity "will be at heightened and intensive levels" during the second phase.

"The seeds planted in the second phase are likely to be vast, and they will be setting the stage for a bumper crop of transactions" during the third stage and then a "return to normalcy," the report said.

DeVoe & Co. predicted that RIA M&As will "eventually return toward the steady upward trajectory that the industry has seen for the last six years" and that the "trend will continue for several years to come."

— Check out Switching BDs in a Pandemic: How One Team Did It on ThinkAdvisor.