Aggregation could be watchword as the big strive to grow bigger

Many more retirement plan advisory firms are expected to put their firms up for sale, marking what some say might be a watershed year in deal-making with larger, better capitalized "aggregator" firms.

"2019 was really the first big year in acquisitions in the retirement advisory space," said Dick Darian, the Charleston, S.C.-based CEO of retirement M&A consulting firm Wise Rhino Group. "I think you're going to see that continue into 2020."

Mr. Darian was involved in some 17 transactions in 2019, a number that he anticipates will double this year, with several expected to close by the end of June. The sellers in last year's transactions collectively represented more than $55 billion in assets under advisement and had revenues ranging from $2 million to $9 million, he said.

In addition, the firm was engaged in more than 30 firm assessments last year, "a leading indicator," Mr. Darian said, of projected merger and acquisition activity. "We're being hired by many. It's off the charts," he said. "We've got a significant pipeline of assessments that are going to lead to market searches that will lead to mergers."

Besieged by escalating technology and client demands, rising regulatory constraints and relentless fee pressure, many firms are realizing that they can no longer survive on their own. They need the scale, resources and capital of larger organizations to help them grow.

With aggregator firms like CAPTRUST Financial Advisors and Hub International Ltd. scooping up ever more firms and bulking up in size, smaller firms are getting further left behind. "The bigger they get, the harder it is for a smaller unscaled firm to compete on price and services," Mr. Darian said, referring to acquisitive zeal of aggregator firms.

Hub International was by far the most aggressive aggregator last year, picking up nine firms, including Global Retirement Partners, a $40 registered investment adviser through which many of the firms Hub bought cleared their transactions. In addition, Hub purchased two large insurance-related companies — The Insurance Exchange Inc. and SilverStone Group — both of which had significant retirement plan businesses.

Hub expects an equally active 2020. "We anticipate 2020 will look similar to 2019 with up to 10 or so acquisitions," said David Reich, the San Diego-based national president of Hub retirement and private wealth.

CAPTRUST too sees a strong pipeline of potential acquisitions. The longtime aggregator has been buying firms since it launched its so-called "NFL strategy" in 2006, a strategy that looks to have retirement plan and wealth advisory businesses in cities that have NFL franchises. In 2017, it set a target of 50 acquisitions over a 10-year period, or about five acquisitions a year.

"Our pace for the last couple of years, which was five to seven a year, will be the pace you'll see for us going forward," said Rick Shoff, managing director of CAPTRUST's advisory group in Doylestown, Pa.

CAPTRUST last year bought five wealth management and retirement plan advisory firms, including FiduciaryVest, which served more than 50 plans and had $13 billion in assets under advisement. It also had several deals involving sizable retirement practices that were expected to close last year but bounced instead to this year, according to Mr. Schoff.

Numbers on the asset size of the retirement plan advisory market were hard to come by given the difficulty in isolating the retirement plan business from the wealth planning business of RIA firms. Cerulli Associates calculates that there are more than 17,000 retail-focused wealth management and retirement plan advisory RIA firms in the U.S., collectively managing $4.8 trillion. The firm estimates that the total addressable market for RIA acquisitions over the next five to 10 years is $2.4 trillion in assets under management, with $348 billion managed by smaller RIAs having difficulty growing.

"For a lot of these advisers, especially the smaller to midsize ones, they're weighed down by operational challenges," said Marina Shtyrkov, wealth management research analyst at Cerulli in Boston.

Indeed, operational challenges, along with downward pressure on client fees, is threatening the work retirement plan advisers do, according to industry observers. "As folks get bigger, they're able to charge less as they scale," Mr. Darian said.

Another challenge stems from growing client expectations, which unscaled retirement plan advisory shops are unable to meet, according to experts. Firms can no longer survive by merely providing plan design and compliance advice to C-suite executives as they did in the past, Mr. Darian said.

"You're going to have to do more in order to drive revenue," he said. "You have to engage the plan participant and to do that effectively you need a technology capability combined with a human capability and that takes money and expertise to build."

Another reason leading some firms to consider selling revolves around open multiple employer plans, which the recently passed Setting Every Community up for Retirement Enhancement Act facilitates. In a survey of 530 retirement plan advisers this summer, the National Association of Plan Advisors found that 36% of advisers would look to sell their practices if open MEPs became a reality.

For smaller practices that work in the small plan market, open MEPs could pose an "existential threat," Mr. Darian said. "If the government makes it easier for plans to become commoditized, then it takes away from the value proposition of the adviser," he said.

The strong seller's market is also adding to the desire to sell. Large firms with an RIA and multiple offices are especially prized, fetching multiples in the range of nine to 10 times earnings before interest, tax, depreciation and amortization, according to Mr. Darian. Elite firms with $1 million to $10 million in revenue can earn multiples in the range of 8.5 to 9.75 with "everybody else" receiving multiples in the sevens.

Whether valuations will continue to rise is an open question. "It remains to be seen," said Mr. Darian. "I think we're getting close to the peak, if not there."

Many firms may also want to capitalize on the strong market before it turns south. Fears of a market downturn would scare away buyers and lower valuations, leading firms to think that "maybe now is the right time (to sell) when things are going well and the markets are at their peak," Mr. Darian said.

Buyers, too, have a strong economic reason for making deals as lending rates are at historic lows, according to Carolyn Armitage, a managing director at investment bank and consulting firm ECHELON Partners LLC in Manhattan Beach, Calif. Transactions in the retirement advisory space should continue, she said, due to the low cost of borrowing money.

In addition, the number of available lenders is unprecedented, giving buyers the chance to "price shop for the best interest rate and terms," Ms. Armitage said.

Due to the favorable dynamics on both the buyers' and sellers' sides, the "M&A frenzy" that marked 2019 "should continue well into and beyond 2020," she said.