Without a substantial increase in transition planning on an accelerated timeline, RIAs face the potential risk of a “succession crisis,” likely leading to too many sellers coming into the marketplace at once, according to a new report.
“Despite the headline sessions on the topic at every industry event and the consistent media coverage about this exposure point for the industry, the number of advisors implementing written succession plans doesn’t seem to budge,” DeVoe & Company observes in its third annual RIA M&A Outlook Study.
“COVID is a shot across the bow for any advisory firm that is operating without a succession plan. We now live in a world where going into the office can be a life or death decision,” says David DeVoe, Founder and CEO of DeVoe & Company.
Interestingly, advisors in the $500 million to $1 billion segment voice the greatest concern, with 65% indicating it’s a big problem, according to the study. “Perhaps these individuals are reflecting on their own situations, as firms in this zone are commonly grappling with the ability of G2 to buy out G1,” the study observes.
The findings are based on an annual survey of RIAs to gauge current and shifting perspectives about M&A within the industry. This year’s survey received 128 responses between late May and late June from senior executives, principals or owners of firms ranging in size from $100 million to over $5 billion in AUM.
Advisors responding to the survey also expect merger and acquisition activity to continue at a pace similar to recent trends and the likelihood to sell internally jumped significantly from last year.
Internal Successions
DeVoe notes that for firms that are actively engaged in internal succession, the vast majority (92%) are staying the course with their efforts and timeline despite the pandemic.
By contrast, 7% of RIAs plan to delay internal succession, with these firms tending to lean on the smaller side. Nearly all advisors that indicated a pending delay are under $500 million in AUM and these organizations are likely driven by the reality of post-pandemic RIA management, the study notes.
“The owners of these organizations split their time between running the business and caring for clients. When the pandemic hit, they shifted all of their energy toward helping clients,” DeVoe explains.
Meanwhile, the percentage of advisors indicating that G2 can afford to buy out the founders has increased to 39% in the firm’s 2020 survey—up from 34% in 2019.
“We believe this shift is related to advisor expectations on RIA valuations,” the study observes, further noting that the confidence in affordability is even more profound for mid-size firms, with 60% of respondents in the $500 million to $1 billion segment indicating next gen can afford to buy out the founders. “In this middle range of RIA size, there may be a ‘sweet spot’ where preparedness and capacity converge,” the study explain.
RIAs also indicate that they are “much less likely” to sell an external stake than last year. In 2020, a third of advisors indicated openness to sell a stake externally, down from half of respondents a year ago, DeVoe notes, observing that this shift in such a short period may be directly or indirectly related to COVID-19.
M&A Activity
Meanwhile, the majority of polled advisors anticipated that M&A activity would slow for a few quarters before it bounced back to the historic active clip. According to the findings, three-quarters of respondents predicted 2020 to be the first down year for M&A in a long time, while another quarter of advisors indicated that 2020 would be about the same as the 132 deals in 2019.
“Fortunately, Las Vegas has been closed for several months, as surveyed advisors would not have done well in the casinos,” the report states, adding that, “Not a single advisor indicated that 2020 would likely be above 2019, yet that is precisely the current course.”
Intent to acquire is much higher for larger firms, according to the report, with nearly two-thirds of firms greater than $500 million planning to acquire within two years. By contrast, only 32% of firms with $100 million to $500 million in AUM plan to make an acquisition in that timeframe.
The report also found that 21% of firms delayed their plans to acquire due to COVID-19. Not surprisingly, the delays are correlated with the size of the firm. According to the findings, 38% of firms under $1 billion in AUM indicated the pandemic delayed their plans to acquire another firm.
While firms with $1 billion or more in AUM are more likely to acquire a firm than their smaller colleagues, their expectation to do so has dropped more than 10 points from a year ago. “During a pandemic or not, an acquisition is a significant undertaking for RIAs of any size, and firms aren’t taking it lightly,” the report states.
This article originally appeared on NAPA.
