What Financial Advisors Can Learn From the 2020 Mergers and Acquisitions Landscape with Mark Bruno

In this episode of The Data Possible Podcast, Mark Bruno, managing director at ECHELON Partners, discusses ECHELON’s recently released 2020 RIA M&A Deal Report and key trends and predictions we should know about as we head into 2021.  

You will learn:

  • Important factors driving M&A deals today
  • What minority buying is and how it is used to bolster advisor practices
  • Advice for firms new to M&A
  • What to expect in 2021

Resources: ECHELON Partners | Discovery Data

Related: The Digital Advertising Landscape With Matt Kelly



Mark Bruno, Douglas Heikkinen

Douglas Heikkinen  00:02

Hello, and welcome to the data possible podcast presented by discovery data. This is your host, Doug Heikkinen. Today, our guest is Mark Bruno, who's a managing director at Echelon partners. Echelon is one of the leading investment banks to the wealth management industry. Welcome to the podcast Mark. . .

Mark Bruno  00:19

Thank you very much for having me on, Doug. Appreciate it. Happy New Year to you too. I'm

Douglas Heikkinen  00:23

I'm looking forward to this. We're going to talk a lot about the industry m&a activity this past year, and what you expect to happen in 2021. But Echelon just released their 2020 ra EMI m&a deal report, can we start with some of the highlights from the report?

Mark Bruno  00:41

Absolutely. And we actually came out with the Sneak Peek right before the holidays, because it was such a remarkable year on so many levels for the IRA industry and also for m&a. I just say top line, what we saw in the fourth quarter was a record number of deals that took place for a single quarter. And we actually saw that in the third quarter two, after the q2 bottleneck was relieved a little bit. People got back to normal deal making activities and normal deal making processes. And we actually tracks 55 deals in the third quarter, which was up until just a couple of weeks ago, last week, actually a record for a single quarter. In the fourth quarter. Right now, we're still finalizing our data, but we're looking at about 69 or 70 deals. So it's about a 25% increase over the third quarter, and about two thirds of all the m&a activity that took place last year in the IRA industry in the second half of the year.

Douglas Heikkinen  01:37

Sorry to interrupt you for a second ... there that surprise you. I mean, people can visit each other, we have to do everything over zoom. Is that just crazy numbers?

Mark Bruno  01:47

It's a great question. Right? And it did. And it didn't surprise us. And what I mean by that was we knew with any deal, normal lifecycle is low in six months, right? Realistically, it's a full year from beginning to end, right. So when things stalled a little bit in the second quarter, it wasn't like deals completely fell apart. And, you know, they really just sort of got back on track in May. And June. I think, also when deals come together, they don't just come together overnight. Right. So we did have some visibility. And we knew that the second half of the year was going to be active with or without the impact of COVID on the economy. But I think the rate that we saw, especially in the fourth quarter was definitely accelerated. I think there are a lot of factors. We'll get into some of the specifics, I'm sure during this conversation, but there are definitely some other motivators with Biden are moving into the office and potentially revisiting tax plans. Right. There were some motivations for people who are selling this year to actually sell before 2020 ended, the calendar year ended, right. So they avoided a potential change in the tax code that might potentially be you know, just add this advantageous to them, you know, if they sold in 2021. So very unusual, lots of different factors, you know, coming from all over the place that motivated it. But it didn't surprise us because we knew there was a lot, but it did surprise us because it was more than we anticipated. Any Other highlights you

Douglas Heikkinen  03:17

Want to tantalize people with before we move on?

Mark Bruno  03:20

Sure. I think the most notable thing is it wasn't just fourth quarter, you know, that was a record quarter, it was the full year 2020 that actually ended up being another record year for m&a in the wealth management industry. And that was pretty remarkable, right? All things being considered, you know, given where we were back in April and May. So in the end, you know, this is the eighth consecutive year with our deal report that we've tracked in terms of the number of deals a new all time high, we've had a new record. And we've also this is really interesting to the size of the firms that were acquired, on average are roughly about 2 billion in assets under management. And that was also a record high too. So more activity, larger firms and more sophistication, though, those were the top line key findings for our deal report, the Sneak Peek that we put out, and then the full report that we'll be releasing momentarily.

Douglas Heikkinen  04:13

Yeah. What are some of the key trends you're seeing in m&a right now? In the past year and and moving forward?

Mark Bruno  04:21

Sure. There, there are three that I'll touch on quickly. And if there are any that you want to get into more detail on, just let me know. But I would say in general, on the buyer side, we're seeing so much more sophistication. And so many of the deals that were getting done in 2020 and will get done in 2021 will be basically involving professional buyer, so to speak, and these are firms that a huge part of their business model is based on doing acquisitions. In fact, about two thirds of the deals in 2020 that took place were firms that had done multiple acquisitions last year. So they're getting more sophisticated, they have dedicated deals teams, they have the backing of private equity or other long term investors, there's a ton of capital there, and they know how to get deals done. So that on the buyer side is a huge trend. On the seller side, I think there are a lot of people who are still motivated to sell not just because the valuations are strong, but there are just more options for sellers right now. And one we used to just associate with selling sort of an exit or succession. Now there are a lot more gradual transitions, selling stays, there are minority sell options that are out there. So you know, we're just seeing sellers that are getting a little bit more savvy, right, a little larger, as I mentioned before, obviously, and exploring all of their options, not just hit the exit button and disappear, right, but to potentially find a buyer or a partner who wants to help them grow, and then maybe transition the business over time. And then the last piece is just evaluations, they're still very, very strong. Not surprising, right? The markets recovered nicely and hit all time highs within just the last couple of weeks. So we're seeing dealer activity and all time high sides of the firm's are the largest we've ever seen before. And deal values, in some cases, you know, are the strongest that the industry has ever experienced,

Douglas Heikkinen  06:11

In your opinion, these professional buyers that are getting bigger and bigger, is this good for the investor?

Mark Bruno  06:18

You know, I do think it's good for the investor? And that's an important question, right? Because that doesn't get asked a lot, right? We get asked a lot about deal value deal structure, and, you know, post closed and do can you integrate all these companies? But I think it's an important question, because you're starting to really help build organizations that can scale quite a bit, right? So rather than being you know, if you're a billion dollar, wealth manager, you're still a small business, right? in many, many ways, you might only have 15, or 20. People who work for your firm, now you're able to plug into a platform, right? Whether it's technology, broader operations, a lot of these companies have very strong robust marketing engines, right. Or you could also plug into their investment management platform and rely on a deeper research team and investment organization. So yeah, I do think in the end, it's better for investors because the advisors get to focus on advice, right, and not just running a small business. The the buyers are the ones who are now saying, we'll take care of the professional management and day to day sort of operations, if you need help there. And whatever we can do to help you grow and be more efficient, you know, we're here, right? So I do think in the end, it's, it's good for the investor. Gosh, sometimes

Douglas Heikkinen  07:35

It sounds like we're just building the new phase of wirehouses.

Mark Bruno  07:40

It does feel like that sometimes, right? And in some ways, it's actually you think about it. I've heard a couple of people use the analogy. It's almost like the celebrity chefs. Right? You know, we're not necessarily seeing our eyes that are turning into the next the McDonald's or Burger King or Wendy's, right, you're seeing firms that are really high quality, really well run, have a really unique value proposition and way of delivering advice. And they're being carefully franchised very much like someone like Danny Meyer, for instance, right? built himself out of what was at some point, just a handful of restaurants into a national brand, that, in my opinion, at least, isn't diluted, or from what it was. It's very early stages. So not necessarily rebuilding the wirehouse. Right, but reinventing that sort of concept or the model, right, but with a little bit more selectivity, right, is probably not a bad way to think about it.

Douglas Heikkinen  08:40

Yeah. But if you're if you're being bought by one of these professional advisors, who's in one area, and you're kind of way far away, can you actually use that brand to help you?

Mark Bruno  08:52

Everybody has a different model, right. So there are some acquires that would ask you or require you, right? To adapt their doctor, their brand, right? Others would just leave you to, you know, run your business, the way you always have, at least from a brand new or a marketing standpoint. And while you might not necessarily need to tap into, you know, the home office, right, or the mothership, like you know, a wire house, you do have the ability to connect with other firms that are under that umbrella, right. So you do have these sort of sister or companion firms where in some cases, you're seeing, especially with retirees, they're moving from, I'm in the tri state area. So I'll pick up stick with New York, moving from New York to Florida, and they need another advisor or some other touch point when they're spending half the year in New York half the year in Florida, right in a normal year, I should say. And I think that there are ways that you can use these networks right to help expand if you're the advisor or the delivery of your advice or to help expand those services, that relationship And the support, right that you're giving to your clients. So it'll look very different from the wirehouse model. There's no question, right, because the emphasis isn't on production and revenues so much as it is essentially the service, quality of advice, right? And relationships. So, you know, we'll see how it plays out. Right. But I think you're not wholly reliant on that home office, or you know, the mothership, if you will, to support it did to be or be on at all?

Douglas Heikkinen  10:30

All right, let's touch on something else that you you'd mentioned earlier. For those who may not be aware, what is my, what is the minority buying meme? Or a minority buyer? Sure.

Mark Bruno  10:41

So basically, we're looking at firms that are you could even really call them minority investors in some cases, right? Because while they're taking a stake in an ri, they're there, it's not a controlling stake. So there are definitely firms that you've seen, you know, emigrant merchant investment, you know, they've been very active over the last year plus, and they could be buying under 20% of a firm, right? They could, and that that may actually become more common, I think it's a nuance that doesn't get talked about a lot. But if you're acquiring less than 20%, then you don't actually have to go out and get consent from all of your clients, right? If you're an advisor for change in ownership. So you can fly under the radar, right? You're getting some cash, if you're taking 99.9%, from one of these minority acquires, you're taking some chips off the table, if you're the firm, owner, and you're also tapping into some of the other types of resources that I talked about before, you're still in control of your business, you're still running it right, you're still making all the decisions. From a governance standpoint, right? You're the decision maker, if it's a firm that has a single owner like that. But I do think you know, it's an interesting, if you're thinking about selling your firm, right? It's, it's a, it's a big, dramatic and emotional decision. It's an interesting to half step forward, right? It's a way to date before you get married. And it's also a way to not relinquish too much control before you actually or if you ever want to explore doing a full sort of majority deal with another partner. So just one other thing I would actually add from our deal report, there were three times a number of minority acquisitions in 2020, than there were in 2019. And I don't see that slowing down anytime soon.

Douglas Heikkinen  12:40

So. the cash influence or getting the cash as well as dating is a huge factor for driving these deals. Anything else?

Mark Bruno  12:50

Definitely. I think it's also in some cases, you're seeing firms that are in the earlier or sort of mid stages of their life cycles, right? So many of the traditional deals that you've seen getting done over time, are involving an owner or group of owners who are looking for a succession solution. Yeah, I have clients now who are in their, you know, 40s, early 50s, who don't have to sell, right. But they see some of these options that are out there. And it's really compelling. And they're saying, maybe I will do a minority deal, because in a lot of cases, if you own and run a firm, that is your biggest asset, right in terms of in your personal wealth. So if you've run and built a very successful business, the cash itself is a great way to take some chips off the table. And it's also a great way for you right to grow the business. And who knows, 10 years from now, you might want to look at selling again, right? That's the beauty of this business. And you could sell your firm twice, right? If you have the opportunity to write and I think just a few years out, you'll see even more players in this space who are looking to provide sort of minority investments in RI firms to

Douglas Heikkinen  14:06

What does this landscape mean for all advisors and what they should they be thinking about?

Mark Bruno  14:14

I think in a lot of ways, kind of to break it down by size. Right? So the firm's under 100 million. I'd say that there there are firms that are 100 million to say 500 million, and then there's 500 million plus i think that consolidation means different things for different parts of the business. I think the firm's that are 500 million and up. I mean, that's where we're seeing, obviously, quite a bit of consolidation. So I think those firms will have the consolidation have the biggest impact on on that segment. First and foremost, I think those are the firm's in terms of size, that are getting the strongest valuations. Those are the firms that if you're looking at the professional buyers, they want to acquire most so there is a ton of competence addition. And there are also not a lot of firms, right that are in that size, we tend to think of the RA industry as being 30,000 firms. But really, you're somewhere in the neighborhood of 4000 or so, if you're counting the number of firms that have over 500 million in assets under management, you know, that 100 million to 500 million might be the next group impacted. There's definitely an interest in acquiring those firms. But it's not nearly at the level as the 500 million and billion dollar plus firms, I think those firms are trying to grow quickly trying to show growth, right and trying to prove if they're looking, whether it's a minority, or they're looking to sell majority stake in their business, that they have really long term growth potential. And by plugging into maybe a bigger platform, or merging with a firm of similar size, they can create sort of exponential growth. So they're the ones who are, you know, out on the field improving it, whereas, you know, the 500 million or more established, right, and I would say are, you know, sort of in more marketable at the moment, and then the 100 million and below is sort of a different story, right? You tend to have firms that are just solo practitioners. And there are so many of those firms that it would be hard to just summarize and say what the state of the state is for all of them. But there are definitely firms that in that size range that are looking at ways to either, you know, merge or sell their businesses to maybe the 100 million to $500 million firms, right, as another way for that second category, I mentioned to show some accelerated growth rates, too. So there is a little bit of a waterfall, right, if you will, and it'll impact everybody differently. But the larger firms in the industry are the ones that are most impacted right now.

Douglas Heikkinen  16:47

What advice do you have for firms that are entering the scary world, besides knowing all the data involved?

Mark Bruno  16:54

Sure. I, you know, and I would just add, that was 2017. When I was part of the deal team, that's old investment news, from crane communications to bonhill, group, UK based publishing company. And I call that experience out because I think mechanically, I was very prepared to go in, right, and sort of evaluate some of the potential partners that were out there, evaluate the deals, and you think you're sort of quantitatively ready. Right? And you may very well be, but qualitatively, there's so many things that you have to be prepared for. Right? So I would say, for anybody who's thinking about this, you know, I needed to get myself in a place mentally, where I can envision myself working for different people potentially operating in a different role. Right. And I don't think and this is just a confession, that I personally did enough to really think about what I wanted, right, aside from just getting the deal done, right. And I think that that's something that in the year that I've been at Echelon, I've seen, a number of firm owners are the sellers, sort of say they've thought about, but not really done that deep sort of soul searching and sort of landing on what, aside from the professional goals, right for the firm, what are the personal goals, right for you, as an individual? Where do you see yourself? What do you want to be doing? Right? And what will make you happy, right. So I think that's really the biggest challenge, and a lot of ways is just sort of defining what success looks like for you, for your employees and for your clients. And then the last piece, I would just add there, there are so many firms that are just getting calls right now from whether they're professional buyers, or prospective buyers, or a lot of first time buyers who would really like to do an acquisition to get their work their way into the RA industry here. And there are a lot of unsolicited offers that advisors are receiving and have been receiving for some time. I would say this sounds self serving, but you really do need to talk to whether it's an investment banker or some other firm that has context, right, have some visibility into what's actually happening in the m&a landscape. And I don't think we're gonna get every deal that's out there, right. So it doesn't have to be us. But I think there's really a value, even though you think you can do it independently, and tapping third parties who know what they're doing to not only make sure you get the best price, right when you sell your business, right, but that you're finding the right fit, got the right terms and that all of the constituents, you, your employees and your clients, everybody is going to be in a better place right when the deal actually closes. So it's a lot to think about, but those are sort of the two different lanes, right, that I would encourage people to really thinking, right? Am I emotionally sort of psychologically ready for this? And then do I have the acumen perspective to really go into this because it's a full time job right? And make sure that I'm finding the right partner,

Douglas Heikkinen  20:02

I know you from your Investment News days, and did that experience of going through that transaction lead you and get your interest into moving here because you could have done a lot of different things

Mark Bruno  20:14

100%. And that was, for me, I was always interested in building teams and bringing people together. But going through that process was something that I learned more from right than any other I hate to call it a project. This sort of minimizes, you know what we were doing. But I learned more from that experience than anything else. And through that, you know, that's where I've known Dan Seaver, the founder and CEO of Ashkelon for quite some time, it just seemed like the perfect opportunity to sync up get a lot closer to helping people understand the deal process and not just right, how do we get the right value structure? How do we make sure that you know, we're getting the absolute best combination of firms here? But really, how do you as a firm owner, get the best result the best outcome, right for you, your employees and your clients? So you know, for me, it's been a great transition. So far, I feel pretty fortunate. It's been an interesting, it was an interesting year to try a career change, right. But based on some of the activities that we saw in 2020, and we're looking at for 2021, I wouldn't change a thing. Lastly, let's

Douglas Heikkinen  21:24

Get your crystal ball out what's gonna happen this year in your area.

Mark Bruno  21:28

So without a major event, I would say we would absolutely expect to see more m&a activity and more large firms involved in deals in 2021. I would be really surprised if it wasn't another record your m&a activity in the RA industry, I do think you'll see more private equity money, which we've been seeing for quite some time. I also think you'll see more convergence between wealth management and retirement. You saw some of that last year, and you're even seeing some of it in the beginning of this year, just the first couple of business days of 2021. There have already been some very, very large deals. Today was the aquiline. Sage the deal. And yet yesterday, Hightower announced its largest deal to date. So people may have taken a little bit of a breath over the holidays. But you know, everybody got back to work all at once here. So I don't see activity. I don't see the sophistication, and I don't see the size of the deals decreasing anytime soon.

Douglas Heikkinen  22:44

That's great. Mark has been quite a pleasure. Thank you,

Mark Bruno  22:48

Doug, thank you so much for having me on. I appreciate it. And you'll have to do a check back in 12 months to make sure that I'm absolutely wrong, right because everybody, everybody's right until you call them out and put them on the spot.

Douglas Heikkinen  23:01

We will do a check back. For everybody at Discovery Data and the Data Possible Podcast team. We thank you all for joining us. Take care.


Echelon, firms, deal, year, people, sell, minority, acquires, buyer, industry, advisor, acquisitions, business, m&a, moving, m&a activity, investment, sellers, run, RIA, clients