The torrid pace of first-half mergers and acquisitions among registered investment advisors (RIAs) eased in the second half with the fiduciary rule delay, but transactions still rose 6 percent, an industry tracker reported Monday.
DeVoe & Co. tracked a record 153 deals in 2017 compared to 2016, said David DeVoe, managing partner.
Of the 153 transactions, 44 percent involved teams and individuals who left wirehouses, independent broker-dealers (IBD) and RIAs to join RIAs with lesser Department of Labor fiduciary rule burdens, DeVoe said.
Wirehouses, IBDs, banks and RIAs with a heavy retirement account business found themselves facing so much new regulation that advisors preferred to join advisories with business falling outside the Employee Retirement Income Security Act (ERISA).
“Life changed and paralyzed some advisors’ ability to serve clients effectively because many firms with ERISA businesses ‘peanut-buttered’ the (DOL) compliance process across the entire business,” driving out advisors that were not directly affected by the rule, DeVoe explained.
First-half RIA transaction activity was geared to the fiduciary rule originally scheduled to take effect in April 2017. But the deal environment changed after the Trump administration delayed the implementation of the rule to June 9.
Even with the June 9 deadline, only some parts of the rule went into effect and administration officials pushed back other key elements of the rule until July 1, 2019. It is expected that those aspects will be weakened in the interim.
“As a result, the movement of breakaways joining RIAs dropped more than 50 percent in the last two quarters,” DeVoe said.
In the first quarter, there were 46 RIA transactions, but that dropped to 42 deals in the second quarter and to 32 deals in the third quarter. Deals rebounded to 33 in the fourth quarter, according to RIA Deal Book.
Consolidators Battle Established RIAs
While the breakaway part of the RIA business is more sensitive to “triggering events” from outside forces like regulation, for example, the underpinnings of what drives RIA transactions remains little changed, DeVoe said.
In the buyer category, RIA consolidators such as Focus Financial Partners are attracting the bulk of the advisors breaking away from wirehouses and IBDs. Meanwhile, established RIAs such as The Colony Group are buying more of the other established RIAs.
Consolidators executed 50 percent of the 153 deals in 2017 while established RIAs were responsible for 43 percent of the deals.
Banks were mainly responsible for the rest, though other acquirers – private equity groups, for example – were also active, DeVoe said.
The 13 acquisitions executed by banks was nearly three times the number of bank transactions in 2016. The lower tax rates signed into law last month as part of the Repubican tax reform plan is likely to spur more banks to buy RIAs, DeVoe added.
Banking corporations, which would benefit from the new corporate tax rate of 21 percent instead of 35 percent, could become more acquisitive.
Seller Transactions Rise in Smaller Segment
In the seller segment, transactions involving firms of between $100 million to $250 million in assets grew by more than 20 percent to 67 transactions last year, RIA Deal Book reported.
Advisors breaking away to join RIAs steering clear of the fiduciary rule, smaller RIAs merging into larger firms and RIA consolidators looking to grow and scale up accounted for the activity in the smaller asset segment, DeVoe said.
Transactions among RIAs in the $1 billion to $5 billion segment size fell 30 percent to 19 transactions, RIA Deal Book found.
The decline in transaction activity among the larger RIAs indicates a statistical “return to normal” in the wake of an active 2016, DeVoe said.
With transactions among smaller firms dominating the 2017 seller landscape, the average assets under management of established seller firms fell to $881 million from more than $1 billion last year, Deal Book reported.
Deal Book is sponsored by Nuveen.
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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