Fidelity steps up M&A efforts as RIAs step up the pressure for answers

Brooke’s Note: There’s the possibility that Mark Hurley is spot-on that the mass of financial advisory practices have no enterprise value and the implication that old advisors — like old soldiers — will fade away. It would help explain why the RIA M&A boom is oft predicted and never arriving. But if the boom comes it’ll be sudden and capacity constrained. Companies most affected — like RIA custodians — by how all it all shakes out had better be prepared with some in-house capability to keep assets. Fidelity appears to be the latest player to be taking action with thoughts on this order in mind.

Anticipating a surge in M&A activity as small advisors try to avoid state regulation and existing RIAs continue luring wirehouse brokers to their practices, Fidelity Investment is ramping up the M&A services it offers to its advisors.

It debuts a series of webinars on Sept. 30 and it has a matching service, various new tools and two new white papers. The company has also installed a senior executive to oversee practice management – including M&A — for the first time. The deal-making enhancements have been in the works for about a year. See: Fidelity races to develop M&A program ahead of looming merger boom

David E. Canter, executive vice president at Fidelity Institutional Wealth Services and head of Fidelity’s Practice Management and Consulting organization, took his new position in August after serving as the chief operating officer of FIWS.

The Boston-based custodian is stepping up its M&A capabilities because RIAs are demanding it, he says. Canter also expects the size of transactions to rise.

Hearing from clients

“We’re hearing from clients weekly – large firms considering acquiring other large firms. That’s different from last year and 2008.”

Fidelity sees M&A as a core strategic interest because it’s a means by which the company can help RIAs growth their practices, according to Canter. In fact, the new program that include deal resources is called Expand Your Practice.

In part, the expansion of services is a response to the continued interest of RIAs in bringing aboard wirehouse brokers. But there’s a new factor at play: Fidelity is also preparing for a possible increase in M&A activity as smaller RIAs merge to avoid the new state regulatory regime that’s expected to add compliance complexity. See: What advisors should know about the next sweeping change: the switch from SEC oversight to state regulation

The Dodd-Frank financial reform legislation shifted advisors with $25-$100 million in assets from SEC to state regulation. States already had oversight over the smallest advisors. See: The big change RIAs should expect when the SEC punts to the states

Red tape avalanche

Canter offered the example of an advisor with less than $100 million of assets in Massachusetts that has clients in various New England states and New York. That RIA could be faced with having to register with the regulator in each jurisdiction – an avalanche of new red tape.

“I think that’s coming – small firms concerned about state regs,” he says.

Indeed, David Selig, CEO of Advice Dynamics Partners, a San Francisco-based M&A consultant for wealth managers, says that a small advisor just retained him, citing that regulatory shift as a reason for seeking a merger partner.

“Compliance regulations are becoming more burdensome and they’re certainly taking a toll on small RIAs. The $100 million [SEC threshold] is another example of that. Smaller advisors we’re talking to are exploring what life would be like merging into larger firms.”

Besides providing information to help RIAs prepare for mergers, Fidelity will also help with some matchmaking with its new RIA MatchTool. Typically the result of this program is that RIAs are provided with three willing firms that they could match with, Canter says.

Schwab and Ameriprise as matchmakers

Schwab debuted a database like this in 2004. As of Sept. 12, there are 414 active buyer listings and 81 active seller listings representing more than $9 billion in assets under management, according to the company. Ameriprise also has a similar program.

In developing M&A services, Schwab and Fidelity are necessarily walking a fine line, Selig says.

“A passive program isn’t going to be effective for anyone – they need to do matching,” he says. “Yet the custodians need to be careful not to cross over into investment banking territory. The innovative custodians will push the envelope in assisting RIA clients.”