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Desire for Scale Driving Consolidation in B-D Space: Cerulli

By Alex Padalka February 5, 2021

Scale considerations, in addition to mergers and acquisitions activity in general, are driving consolidation in the broker-dealer space, according to a recent report.

The portion of broker-dealers affiliating with the 25 largest broker-dealer networks has steadily grown over the past decade, Cerulli says in its new report. And that’s no surprise: Broker-dealers must continuously invest in simply maintaining their brokerage and advisory platforms while adding increasingly complex advisor-facing technology in the face of competition, the research firm writes.

“Greater scale enables firms to increase these relatively fixed investments, and returns on those investments can increase significantly when they support a larger number of advisors and assets under management,” Michael Rose, associate director at Cerulli, says in the report. “Additionally, investments made in these areas can significantly increase the appeal of a B-D firm to prospective advisors, better positioning firms to increase market share.”

Advisors rank technology as one the top factors for deciding which broker-dealer to join, Cerulli found. At the same time, advisors are planning to increase their use of client portals, e-signatures, customer relationship management tools and financial planning tools, the report says. The Covid-19 pandemic, meanwhile, also likely drove up the importance of technology among advisors, as they increasingly witnessed its ability to help them expand their geographical scope, boost efficiency and improve communications with clients, according to Cerulli.

The company warns that the success of any M&A deal depends in large part on the acquirer’s ability to hang on to the advisors in the firm being acquired.

“This gives a competitive edge to larger B/D firms with greater scale, and more robust technology and platforms, which are vital to advisor satisfaction and retention during their migration to the acquiring firm,” Rose says in the statement.

In addition, Cerulli says, it’s not just the very large broker-dealers that have an opportunity in the M&A game. Many factors critical to advisor satisfaction aren’t correlated with the firm’s size, including firm culture, advisor support and restrictions on how advisors run their businesses, Cerulli says.

Meanwhile, in the RIA industry, January 2021 is the most active RIA M&A month on record, according to research from DeVoe & Company.

The 29 transactions in the month were 61% higher than the prior monthly record of 18 transactions set in January 2020, according to DeVoe, a consulting firm and investment bank that focuses on the wealth management space.

The January volume sets the stage for the first quarter with more than 50 transactions, and potentially significantly more, DeVoe says. The industry crossed 40 transactions in a quarter for the first time in the third quarter of 2020.

"The surge in M&A activity has continued its momentum in the RIA industry,” David DeVoe, the firm’s founder and CEO, says in a statement. "This unprecedented volume is being driven by Covid’s succession wake-up call, high valuations and sellers' interest in gaining the power of scale."

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