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RIA M&A Deals in 2019 Set Record for 7th Straight Year

Industry Trends and Research

M&A activity in the wealth management industry reached a new record high in 2019 – the seventh straight record-setting year, according to a new report by Echelon Partners. 

The 2019 Echelon RIA M&A Deal Report shows that the year’s 203 transactions – or roughly 17 per month – represent a 12.2% increase over last year’s record level and a 15.4% compound annual growth rate (CAGR) over the past five years.  

Last year’s deals signal four trends, according to the report: 

  • consolidation among the largest firms;
  • heightened private equity interest in the independent broker dealer industry;
  • a race to build a robust WealthTECH product suite; and 
  • the aggregation of retirement planning assets.

“The year’s record total demonstrates that, despite heightened valuations and market volatility, structural forces in the market continue to drive deals to the finish line,” the report notes, adding that “[f]irms increasingly view the benefits of consolidation versus a path of independence.” Moreover, the report emphasizes that larger firms benefit from cost savings, have resources to invest in the latest technology and have an easier time recruiting talent.  

Given these trends, Echelon predicts that approximately 210 deals will close in 2020, or approximately 18 per month.

$1 Billion-plus AUM Targets

According to the report, 2019 saw a 33% increase in the number of M&A deals and breakaway transactions involving wealth managers with more than $1 billion in AUM, “breaking a trend of relatively little growth” that the industry had experienced since 2015. 

With more than 500 wealth managers over the $1 billion in AUM threshold, Echelon notes that the deal volumes of recent years would suggest that over 10% of the firms have conducted a transaction, believing that is a “more accurate representation” of industry-wide deal volume. 

As to why there is more buyer interest in these $1 billion-plus AUM targets than in smaller firms, the report offers the following reasons: 

  • they are ideal platforms believed to possess the ideal mix of size and development; 
  • they are established businesses, often having more infrastructure, systems, management and financial wherewithal; and 
  • most have more than $3 million in EBITDA. 

That said, Echelon further emphasizes that M&A activity is expected to increase across the board and – despite the increase in billion-dollar deal activity – transactions involving practices with less than $100 million in AUM will continue to overshadow the M&A market by number of transactions. “Most deals of this size go unreported, so it’s very difficult to develop a precise picture of what is happening in that sector of the market,” the report states. 

As for firms leading the buying activity, strategic buyers or consolidators accounted for 41% of transactions in 2019 with a deal count of 83, the most of any category and in line with the category’s levels since 2015, the report notes. 

In the past five years, these firms accounted for an average of 43% of the industry’s reported deal activity, up from the 31% of reported deals that this category was responsible for in the five years preceding that period. Echelon notes that this group is not all rollup firms, but instead represents firms that primarily already have a platform, have considerable industry knowledge and have done several M&A transactions.

For RIAs, Echelon notes that this group has increased only slightly from its all-time low in 2018, closing 57 deals or approximately 28% of wealth management transactions in 2019, below what the category was responsible for between 2009 and 2017. 

Breakaway Activity

Breakaway activity, meanwhile, increased for the second straight year, setting a new record for the number of annual deals. Echelon reports that there were 655 breakaways recorded in 2019 – a 21.7% increase over 2018 and a 40% increase over 2015, the previous record year. 

According to Echelon, “the heightened breakaway activity has been attributed to several key industry factors, including the expiration of forgivable loans issued to advisors during the 2008 financial crisis and the dissipation of fears related to several wirehouses removing themselves from the longstanding broker protocol within the past two years.” Moreover, the report notes that breakaway activity has also increased, in part, due to an aging advisor population preparing for liquidity events. 

And while RIAs are becoming a “more attractive destination” for advisors, Echelon notes that some RIAs are “not doing a very good job” of aligning the contributions of their most valuable employees with the rewards provided, causing an increasing number of partner-level professionals to leave the firms they helped grow. “Given the ‘slow to change’ profile of some RIA owners, we expect RIA breakaways to continue increasing and to become a larger part of overall breakaway activity in the foreseeable future,” the report emphasizes. 

Echelon notes that the biggest winners in terms of assets gains from breakaways included Wells Fargo Advisors Financial Network ($19.8 billion) and Raymond James Financial Services ($18.6 billion). The teams that reportedly lost the most assets from breakaways included Wells Fargo Clearing Services ($70.3 billion) and Morgan Stanley ($24.5 billion).

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