It looks like 2017 could be a big year for RIA M&A, according to a new survey.
Across all firm sizes, more than three out of four RIAs indicated their growth plans include a merger or acquisition over the next five years, according to FA Insight’s “Securing Your Firm’s Future” survey. Of those considering a transaction, more than 60% plan to acquire a solo advisor, while 47% intend to buy just a book of business. Just over 4 in 10 (42%) anticipate acquiring firms with multiple advisors.
The financial advisor industry, which on average entered into 42 transactions a year from 2000 to 2014, saw M&A announcements surge to a record 85 in 2015. While that deal count slipped to 77 last year, 2016 still ranked as the second-highest since 2000, according to FA Insight data.
Over the past five years, roughly one third of transactions involved a solo advisor folding into a larger, existing practice, while 15% were purchases of books of business. More than half (52%) of 2016 investment advisory firm transactions featured an RIA as the acquirer.
More than a third of respondents to a separate FA Insight survey last year said they were involved in a transaction during the previous five years, compared with 26% in 2014. Now, 76% of advisors expect to be in a transaction over the next five years.
Bigger, ‘Better’?
The survey found that as RIAs increase in size, so too does their interest in M&A. Among advisors with $1.5 million to $4 million in revenue, 76% expect to be involved in a transaction over the next five years, up from 50% who experienced a deal in the previous five years. Among firms generating $4 million to $8 million, 100% expect to enter a transaction, versus 69% that did a deal in the past five years.
For advisors, revenue growth and economies of scale were the biggest drivers of M&A activity. Other catalysts for increased activity include a steadily aging population of advisors, some of whom may look to cash out firm equity as retirement age nears.
Indeed, respondents said one out of four deals provided some type of succession solution for firm owners. Seeking a succession solution is a motivator for 30% of advisors contemplating a deal over the next five years.
M&A Motivations
The survey also found that 17% of firms completed a deal to reach a new market, whether expanding geographically or to build up a presence within an existing niche. Fifteen percent pursued M&A to add skills or fill a gap in expertise, while 7% did so to increase their service capabilities.
M&A isn’t a silver bullet, to be sure. Some transactions can fall short of delivering expected benefits, which might be caused by a bad cultural fit or lack of alignment during the transition. Still, if due care is taken, M&A can be part of a broader strategic plan RIAs employ to grow and evolve their business.
