Fidelity’s Latest Move to Stay on Top of RIA Trends

Fidelity’s Partnership with Merchant Investment Management

Current Events Wealth Management

On June 10th, Fidelity Clearing & Custody Solutions and Merchant Investment Management announced a new partnership to increase wealth managers’ access to capital for acquisitions and growth initiates.

With the average transaction size in wealth management M&A increasing 30% in the past year, Fidelity Clearing & Custody Solutions will work with Merchant Investment Management to help firms drive growth and scale in an increasingly concentrated market.

Overview of Strategic Alliance

Fidelity Investment Management, one of the largest discount brokers in the U.S., began offering more customized products and solutions to wealth managers over the last few years through Fidelity Clearing & Custody Solutions, which provides a comprehensive clearing and custody platform to RIAs.  While it is typical for custodians to maintain loose affiliations with specialty lenders in order to address the capital needs of RIAs, Fidelity has taken this to the next level by formalizing a strategic relationship with Merchant Investment Management.

The deal opens up a sizable new sales channel for Merchant, and in return, Fidelity’s behemoth platform tacks on additional selling points to entice M&A-minded RIAs.

Merchant provides growth capital to wealth and asset managers looking to grow or take advantage of strategic opportunities. The company provides capital in the form of minority, non-controlling equity investments and credit solutions. Additionally, Merchant offers management resources, such as regulatory and compliance assistance, as well as outsourced CIO services.

As part of the partnership, Merchant will offer Fidelity’s custody clients discounted loan origination fees, as well as discounted rates to some of Merchant’s products, such as Advisor Assist, which offers a suite of compliance solutions, and Compass, which provides outsourced CFO and accounting services for advisory firms.  The deal opens up a sizable new sales channel for Merchant, and in return, Fidelity’s behemoth platform tacks on a few additional selling points to entice M&A-minded RIAs.

Fidelity’s Motivation

The last 18 months have been busy for investment manager M&A. Several trends are driving the uptick in sector M&A, including rising fee pressures, increasing compliance and technology costs, and organic growth strains. Wealth management consolidators such as Focus Financial, Hightower, and now, Goldman Sachs have capitalized on these trends, and Fidelity seems to be throwing its hat in the ring as well.

David Canter, head of the RIA segment at Fidelity Clearing & Custody Solutions, explained Fidelity’s interest in this partnership:

Today’s most competitive and future-ready firms are achieving scale through M&A.  By our count, there are over 700 RIAs that manage over $1B, and they’re often doing so with national footprints.  But it takes capital to create scale—and with the average deal size increasing three-fold in the past five years, access to that capital can sometimes be a roadblock.  Lending solutions like this one are a game-changer for firms looking to make strategic acquisitions to create long-term, sustainable value.

Chasing Trends

As one of the largest RIA custody platforms, it certainly makes sense for Fidelity to keep its finger on the pulse of the RIA industry. Fidelity has strived to keep up with RIA trends over the last decade, and the partnership with Merchant appears to be the latest in a series of moves aimed at staying on top of the industry.

As part of its efforts to keep pace, Fidelity launched a Robo-advisor platform in 2016.  Just a few years later, Fidelity Go was named the Top Robo Advisor in the 2019 winter edition of The Robo Ranking Report from Backend Benchmarking.

As passive products have proliferated, Fidelity has backed away from its former strategy of avoiding low-margin products. In 2018, Fidelity gathered $64 billion in passive products, compared to active product outflows of $17 billion, according to Morningstar estimates. 

Fidelity was the first discount broker to offer a no-fee index fund.

In August of last year, Fidelity fired major shots in war over fees when it launched two zero-fee mutual funds and reduced fees for 21 of the firm’s indexed mutual funds.  Fidelity was the first discount broker to offer a no-fee index fund—beating out the likes of Vanguard, Schwab, and iShares. 

And now, with the Merchant partnership, Fidelity appears to be positioning for further consolidation and M&A activity in the industry.  Assuming recent M&A trends continue, the Merchant partnership may provide a meaningful incentive for RIAs to use the Fidelity platform.

Outlook for Strategic Partnerships

We expect RIAs to continue to seek bolt-on acquisitions that offer scale and known cost savings from increased operating leverage.  Firms struggling with organic growth and margin compression will likely continue using acquisitions to expand distribution footprints and product offerings.  Against this backdrop, we expect to see more strategic partnerships involving RIA capital providers going forward.