Third-quarter mergers and acquisitions of registered investment advisors (RIA) rose to 37 deals compared to 30 in the year-ago period as buyers gobble up smaller firms, a new survey found.
There were 109 RIA transactions in the first three quarters of the year compared with 100 deals in the year-ago period, according to research published last week in the DeVoe & Co. RIA Deal Book.
There were a record 132 RIA deals last year, the DeVoe research found.
“It’s another great quarter,” said Managing Partner David DeVoe. “It’s a new normal for increased activity and we expect the trajectory to increase over time.”
RIA consolidators, banks and private equity companies remain among the interested buyers. Many RIA sellers face decisions on whether to leave the industry or remain in the market by selling to a larger buyer.
New Department of Labor rules that raise investment advice standards have the potential to affect the RIA community as well as broker-dealers, DeVoe said.
Compliance burdens and the fear of litigation among RIA owners may be adding to selling pressure as selling allows RIA owners to “take compliance off their plate” and transfer the challenges to larger organizations with dedicated staff, he explained.
A separate survey of 957 advisors, also published in October by Schwab Advisor Services, found that 81 percent think RIA regulation will be tighter in 10 years than it is now.
In addition, 40 percent of respondents said keeping up with new compliance demands would be the most critical issue for competitive success in the next 10 years, the Schwab survey found.
Sharp Rise in Subacquisitions
Subacquisitions, or acquisitions made by an RIA affiliated with a consolidator, tripled in the first three quarters of 2016 compared to two years ago, DeVoe’s research found.
There were 14 subacquisitions in the first three quarters of the year compared to five acquisitions in the first three months of 2014, according to the Deal Book.
Not all of the consolidators are themselves RIAs. Focus Financial Partners, for example, defines itself as a partnership of independent fiduciary wealth management firms dedicated to growing the wealth management business.
But because consolidators gather legal and compliance expertise and have access to large sources of capital, they help RIAs within the partnership umbrella buy smaller RIAs and penetrate deeper into the RIA channel.
Focus Financial, with offices in New York and San Francisco, announced last year that it had doubled its credit line to $1 billion to fuel future growth.
RIAs that buy smaller RIAs develop into “affiliates” of the consolidator and, in some cases, the affiliates have enough scale to develop their own compliance and M&A expertise.
Once affiliates acquire smaller RIAs, the acquisition machine begins generate geometric benefits to the consolidator, said DeVoe, who is based in San Francisco.
RIA Segment a Bright Spot
The RIA segment remains a bright spot in a universe where the number of financial advisors in other distribution channels — wirehouse, independent and regional broker-dealers, insurance agencies and banks — are shrinking, according to Tiburon Strategic Advisors.
Growth rates for fee-based advisors grew at a compound 1.8 percent between 2008 and 2014, and it was even higher for dually-registered financial advisors, said Chip Roame, managing director of Tiburon.
There are about 12,000 Securities and Exchange Commission-registered investment advisor firms in the U.S., and Tiburon estimates there are about 28,500 fee-based advisor firms, a number that includes the SEC-registered advisors.
Fee-based advisor firms may grow to as many as 37,000 firms by 2019, according to one Tiburon estimate.
As a result, the share of assets under management gathered by RIAs is expected to rise to 28 percent of all assets in 2018 from less than 20 percent in 2014. That year, RIAs and dually-registered advisors held an estimated $3.6 trillion.
“Pretty much everyone thinks the RIAs will take market share,” Roame said earlier this year.
A handful of RIAs are growing astronomically either through acquisition as Focus Financial Partners or United Capital have chosen to do, or organically as Edelman Financial Services and Fisher Investments, Roame said.
Large Sellers Exit at Record Pace
The third quarter saw 11 RIAs with between $1 billion and $5 billion in assets under management selling their business, compared to only three in the year-ago period, DeVoe reported.
In the first three quarters of the year, there were 24 large RIA seller transactions compared to 17 in 2015 and 9 in 2014, the research found.
“These highly-prized firms are sought after by the widest breadth of acquirers including consolidators, banks, RIAs and private equity firms,” said Tim Forest, a DeVoe & Co. managing director.
It is also the first time that the average size of an established RIA seller crossed the $1 billion mark in AUM, DeVoe’s research found.
DeVoe’s Deal Book research is sponsored by the Chicago-based investment company Nuveen.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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