Financial Advisor M&A ‘Balloon’ Amid Regulatory Burdens

Year-over-year mergers and acquisitions involving financial advisors of all types could double to 1,000 or more deals in 2016 as principals retire or decide they’ve had enough of burdensome regulations, a consultant predicts.

There were 495 transactions involving financial advisors last year, an increase of 30 percent over 2014. The bulk of this year’s transactions are expected to come from independent advisors and insurance agents, said Chip Roame, managing director of Tiburon Strategic Advisors in Tiburon, Calif.

“I think the number of transactions are going to balloon,” Roame said during a webinar on succession planning.

Roame’s prediction of double the transactions is far from universally shared, however.

Only 50 percent of executives invited to a Tiburon CEO summit in October last year said they believed financial advisor consolidation activity would accelerate, compared with 74 percent of CEOs surveyed by the researcher in 2014.

Tiburon splits financial advisors into four categories: independent advisors, which include fee-based RIAs and independent representatives; insurance agents and third-party administrators; accounting firms and law firms; and real estate agents and mortgage brokers.

Of the 495 transactions recorded last year among the four advisor categories, 472 transactions came from independent advisors and insurance agencies and third-party administrators, according to Tiburon data.

The 123 transactions involving independent advisors last year more than doubled from the 54 transactions reported in 2014. The 349 transactions reported last year involving insurance agencies and third-party administrators rose from 320 transactions in 2014, according to Tiburon data.

Roame called the data, complied from many public sources, “relatively accurate.” But it does not represent all transactions in the marketplace since many of the deals don’t always appear in public sources, he said.

Buying and Selling for Offense and Defense

The 10-year transaction trend among financial advisors has slowly been rising from 257 financial advisor mergers in 2005. Older advisors are looking to get out of the market, while other principals seek growth and scale by buying smaller competitors, Roame said.

Still other advisors and agency principals, Roame said, will want to sell for “defensive” reasons — getting out from under heavier regulation expected next year with the enactment of new fiduciary rules issued by the Department of Labor.

But that is far from the only new regulation affecting advisors.

Last year, the North American Securities Administrators Association adopted Model Rule 203(a)-1A, which would require that state-registered investment advisors adopt a business continuity succession plan, according to industry expert and commentator Michael Kitces. States may either adopt the rule or not.

In June, the Securities and Exchange Commission proposed a new rule under the Investment Advisors Act of 1940 that investment advisors adopt and implement written continuity and succession plans.

The plans would detail how client accounts would be handled in the case of a major disruption, including the death of an advisor or the winding down of the business. The public comment period for the SEC rule ended Tuesday.

“We own them (clients) a succession plan,” said Clifford P. Ryan, a Maine-based insurance agent and registered investment advisor.

Industry analysts point to a formalization of the agency sales process, a regulatory push to recurring fee-based revenue models and the entry of larger cash-flow lenders into the market to help finance transactions other reasons for more mergers in the future.

“We've seen a shift over past few years with the advent of bank financing,” said Brad Bueermann, CEO of FP Transitions, a succession planning consultancy in Lake Oswego, Ore.

In the past, banks have shied away from financing agency or advisory practice acquisitions since agencies typically don’t own hard assets, but that has begun to change as lenders become more comfortable with lending based on cash flows, Bueermann said.

Cumulative Data

Cumulative financial advisor merger and acquisition transactions reached 3,725 last year, from only two in 1987, Tiburon’s research found.

Within the independent advisor segment, cumulative transactions reached 758 mergers last year from only 13 in 1999, and among insurance agents and third-party administrators cumulative transactions reached 2,535 last year, from only 205 in 2005, according to Tiburon data.

Among CPA and law firms, cumulative transactions reached 49 deals as of last year, an increase from only two in 1987.

Roame predicted there would be 3,400 cumulative mergers of all financial advisor types by the end of 2019, a tenfold jump from the 320 cumulative financial advisor mergers recorded in 2014.

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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