Biden tax talk seen driving RIA M&A activity

The quarterly updates on mergers and acquisitions in the financial advisory space are sounding like a broken record as the string of unprecedented activity continues with no slowdown in sight.

The 76 deals announced during the first three months of 2021 broke a record set in the final three months of last year, when 69 deals were announced. And that fourth-quarter record had eclipsed the record 55 deals in the third quarter, according to Echelon Partners.

Analysts point to multiple factors driving the white-hot pace of consolidation, including the aging adviser demographic, a flood of hungry private equity money and the expanding array of qualified buyers.

But the newest boost to M&A activity could be the threat of higher taxes under the Biden Administration.

“It’s pretty rare that there might be a common deadline for deals, but there’s the belief that the new administration could make changes to capital gains taxes, and the potential for those kinds of tax changes puts a little more urgency into the mix,” said Mark Bruno, managing director at Echelon.

“Definitely, some people are thinking about it,” Bruno said. “They might have been dragging their feet and now they see it as the right time to sell.”

The 76 deals announced in the first quarter compare to 46 deals during the same period in 2020, when the Covid-19 pandemic was starting to take hold and had a dampening effect on deals during the first six months of last year.

But Bruno said the pickup in activity since the middle of last year can’t be explained as just pent-up demand.

“We’ve got strong equity markets, strong valuations, and advisers are wondering what they’re waiting for as they get closer to retirement,” he said. “And there are so many qualified buyers these days. Years ago, if you were a $1 billion RIA, you might be talking to a $1.5 billion RIA and wonder how they would be able to integrate the two firms and make it work. But today, some of these bigger buyers present new opportunities, which means there are more options for sellers.”

With the first quarter in the books, Echelon is forecasting a record 255 deals this year, which compares to 205 last year and just 168 as recently as 2017.

“It’s still early and anything can happen, but with the pace from the first quarter we’re well ahead of anything we’ve seen,” Bruno said. “These deals typically take 12-to-18 months, so we do have pretty good visibility into the pipeline. But it’s not just math, it’s a combination of the first-quarter activity, activity we’re already aware of, and some outlook on deals that could be driving activity on the back half of the year.”

In addition to the greater number of deals, the size of the deals continues to expand.

Excluding outlier deals above $20 billion, the average assets under management of the target firms during the first quarter was $2.3 billion, which reflects a 29% increase over an average AUM of $1.8 billion for all of last year's deals.

The compound annual growth rate in the size of acquired firms dating back to 2015 is 17%.