‘Extreme Turbulence’ Drives 2Q Collapse Of RIA Mergers: Analyst

Second-quarter RIA mergers and acquisitions fell 21 percent to 32 transactions compared to the year-ago period and it’s “even money” whether mergers finish the year in record territory, an RIA market expert said.

“We are in a unique period of extreme turbulence,” said David DeVoe, managing director at DeVoe & Co. “Quarterly M&A transaction volume has careened to recent record lows, shot up to an all-time high, only to drop back in to the basement again."

The number of RIA deals collapsed compared to the first quarter, which saw a record 49 transactions, the DeVoe RIA Deal Book reported. The first quarter is usually the most active quarter.

Other reasons for the drop in the number of deals:

• Tax reform caused many advisors to wait until early part of the year instead of rushing to close in 2017, which made for an unusually high number of deals in the first part of the year.
• When the markets turn volatile, advisors tend to put off their own needs to focus on the needs and concerns of clients.

Projecting the rest of the year, DeVoe said the underpinnings of RIA deals remain strong.

Last year was a record with 152 transactions despite a second half that was weaker than the first, “but I think we'll probably come in right about where we were in 2017,” DeVoe said.

So far this year, there have been 81 deals compared with 87 deals in the first half of last year. But the deal size increased by 20 percent so far this year over last year.

Some Deals Remain Steady, Others Fall

In the second quarter, M&A among breakaway advisors held steady while the number of deals among established RIAs fell, the survey found.

Eighteen advisors, or teams of advisors at wirehouses, independent broker-dealers and RIAs, with more than $100 million in assets under management broke away from their employers, the survey found.

Last year, there were 17 breakaway advisor deals in the second quarter.

Established RIAs, or RIAs that aren’t leaving a larger employer, closed just 14 deals in the second quarter compared to 24 deals in the year-ago quarter, the survey found.

There were 32 established RIA deals in the first quarter.

Anytime there’s sustained volatility in the stock market, advisors get pulled away from the negotiating table, DeVoe said.

The threat of brutal trade wars, the promise of political summits with nations once considered arch enemies and the fractious immigration debate have provided no shortage of socio-economic drama to frighten investors.

“Advisors have probably done more (client) hand-holding than historically is the case,” DeVoe said.

The Myth Of Independence

The survey revealed more insight on why 2018 may turn out to be a good year for deals despite the drop in the second quarter.

There’s been an important shift away from the independence ethos, a change that suggests advisors are finding that independence isn’t always what it’s cracked up to be.

Two years ago, only 27 percent of RIAs owners said they were open to a discussion to sell an external stake in their RIA compared to 45 percent this year.

RIA owners once looked forward to running their own shop and were passionate about calling their own shots at a time when the industry and owners themselves were younger, said DeVoe, who has tracked the industry for the past 16 years.

“RIAs almost had a bravado about being independent,” he said.

Now advisors are more willing to give up a degree of control for the benefits of scale and the advantages of a larger operation helping them with back office, compliance and administration.

RIAs realize there are benefits to having others take non-core activities off the RIA owner’s plate, freeing the principals to pursue their first love, which is to serve clients.

“It’s not unusual for entrepreneurs to be control freaks, but over time they realized they can’t do it all,” said DeVoe.

An Opening For Buyers

Advisors need help with their own succession and seeking out that help may yet beckon still more deals, DeVoe said.

Only one-third of advisors have a written succession plan in place, which is an “alarmingly low” number, according to DeVoe.

More than half of RIA respondents in a DeVoe poll said that not having a written succession plan will be a big problem for RIAs.

But many other acquiring RIAs appear to have anticipated the opportunity with 60 percent of RIAs in a recent poll indicating they plan to acquire a firm within the next two years, DeVoe said.

Buyers are anticipating the fact that many RIA owners haven’t planned properly for retirement and are willing to sell their stakes.

Long term, this is good news because the industry needs more buyers to absorb sellers unprepared or underprepared for retirement succession.

“It’s a sellers’ market,” DeVoe wrote in his quarterly report. “And it’s a buyers’ market.”

For sellers, RIA valuations are high, the number of buyer RIAs is broad and there are clear benefits of scale.

For buyers, aging sellers approaching retirement is attractive, the lack of a succession plan beneficial, and openness among sellers to talk to buyers is high.

Which is why 2018 may still turn out to be a very good year for RIA deals despite plummeting deals in the second quarter.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].