It was a blockbuster first quarter for M&A dealmaking in the wealth management arena, but RIA breakaways apparently saw an abrupt fall as advisors stayed put, an industry report reveals.
The first quarter 2019 edition of Echelon’s RIA M&A Deal Report notes that the 49 deals occurring during the period was the highest quarterly count since the firm began tracking data. Since 2016, the first quarter has been the most active quarter for RIA M&A and 2019 appears to be following suit, amid what was a tumultuous fourth quarter for 2018 with a 20% drawdown in U.S. equities, the report observes.
What’s more, M&A activity in the RIA industry appears to show no signs of weakening, according to Echelon. “The market is buoyed by aging advisor demographics, emergence of well-capitalized consolidators and private equity sponsors, increased threshold for critical mass in a more competitive market, changing client demand, and a shortage of talent,” the firm explains.
Less Bullish
However, a separate report by Nationwide Advisory Solutions suggests that for the first time in five years, RIAs and fee-based advisors are less bullish about the pace of transactions over the next 12 months. This is based on the latest results from the fifth annual “Advisor Authority” study of 1,600 RIAs, fee-based advisors and individual investors commissioned by Nationwide Advisory Solutions, formerly known as Jefferson National.
A majority of RIAs and fee-based advisors still believe M&A activity will increase and positively impact their business, but the percentage who expect RIA industry M&A to increase has declined nine percentage points – to 59% in 2019 from 68% in 2018 – following a peak of 70% in 2017, Nationwide notes.
“Since launching our Advisor Authority study in 2015, a growing number of RIAs and fee-based advisors were saying that M&A activity would increase – so this year’s sharp reversal in the trend could be an indicator of greater uncertainty about the market and the economy,” says Craig Hawley, Head of Nationwide Advisory Solutions.
RIA-to-RIA
Meanwhile, RIA-to-RIA transactions have surged to the forefront. They were responsible for 17 acquisitions in the first quarter, which was 35% of the total transactions. If this market allocation continues in 2019, RIAs would be buyers in 69 deals, which would be a 41% increase over 2018 levels, Echelon notes.
The resurgence of these transactions, however, has resulted in lower average AUM transacted per deal, registering 13% lower than in 2018. That said, the average AUM transacted remains above $1 billion, the report notes.
On the buyer’s side, Echelon notes that there is still interest from consolidators and strategic buyers, as these “well-capitalized players continue to see significant value in amassing scale in a highly attractive industry.” Focus Financial leads the pack, with the announcement of 11 transactions for the first quarter (both platform and add-on acquisitions), tallying their highest quarterly deal count to date and accounting for 22% of total deal volume. Mercer Advisors and CAPTRUST Financial Advisors also both announced multiple acquisitions, the report shows. Not surprisingly, the first quarter was “hallmarked” by Warburg Pincus’ mega-acquisition of Kestra Financial and its $75.8 billion in AUM.
Breakaway Activity
Meanwhile, in a strong reversal of recent trends, breakaway activity fell sharply in the first quarter. Echelon notes that the 94 breakaways recorded was 36% lower than the 147 breakaways registered in the fourth quarter of 2018 and represented the lowest quarterly count since the second quarter of 2017, which saw 72 total breakaways.
If year-over-year breakaways do fall in 2019, it would represent the first yearly decline since 2016. Since 2013, breakaways have grown at a compound annual growth rate of 8.6%, evidence of a strong trend of advisors relocating and/or moving to independence, according to the report.
Echelon further observes that improved advisor retention programs at wirehouses and a volatile market backdrop apparently are leading to a more risk-averse advisor base. “With wirehouses upping the ante on advisor retention programs, such as the ‘retire in place’ initiative, advisors may be opting to stay put in what has been a fruitful marketplace for representatives yet also a volatile and uncertain one,” the report states.
That said, Echelon further suggests that the pieces are still in place for a significant rebound in breakaway activity in 2019, as a “strong support system of consultants and vendors stand by to aid advisors in their transition to independence.”
M&A Impact
While Nationwide’s survey found that advisors are less bullish about the pace of M&A activity, the majority reportedly still say that these deals will have a positive impact on their business in the next 12 months. According to the findings, RIA and fee-based advisors who say that M&A will positively impact their business stayed at 51% in 2019 and is up slightly from 49% in 2017. Among RIA and fee-based advisors who feel positively about the effect of M&A activity, the top two consistent reasons include greater resources to serve their clients (31% in 2019 from 38% in 2018) and to expand and scale their businesses (31% in 2019 from 35% in 2018).
The ability to create a succession plan (28%) also registers high for those who view M&A positively, while they are slightly less likely to say it increases opportunities to buy another practice (26%).
A relatively small percentage of RIAs and fee-based advisors feel negatively about the impact of consolidation and M&A activity on their business in the next 12 months (12%). The number one reason cited by those who feel negatively was a preference to manage their business independently without oversight (33% in 2019). In previous years, the number one reason was the challenges of competing as a small independent firm (32% in 2019 compared to 48% in 2018).
