RIA Mergers Plunge in Q3 as DOL Rule Delayed

Merger and acquisitions among registered investment advisors plummeted in the third quarter to their lowest level in nearly three years.

Advisors see less reason to merge in the wake of an 18-month delay in the implementation of the fiduciary rule, a new survey found.

Only 29 transactions were reported, down from 37 in the year-ago quarter, according to the survey by DeVoe & Co.

“In retrospect, it seems obvious that the DOL rule had such an impact,” said David DeVoe, a managing partner. “Sometimes you can't read the tea leaves until they are on the table.”

There were 40 transactions in the second quarter, the DeVoe & Co. RIA Deal Book survey found. The survey seeks to track every RIA transaction with more than $100 million in assets under management.

“The unexpected decrease raises the question of whether 2017 will be a record year of activity, which only a few months ago seemed like a fait accompli,” DeVoe said.

There have been 114 RIA transactions in the first three quarters of the year. DeVoe reported 144 RIA mergers and acquisitions last year, up from 133 in 2015.

The election of President Donald Trump, who ran on a platform to loosen regulation, and the subsequent delay in the Department of Labor’s fiduciary rule from Jan. 1, 2018, to July 1, 2019, led to a drop in “breakaway” transactions.

Breakaway advisors, or teams, are those who leave the wirehouse or broker-dealer channel and join the independent channel.

Breakaway Advisors Drag Down Numbers

Only 10 breakaways joined RIAs in the third quarter, half the average volume for a typical quarter, DeVoe said.

“When Trump got elected, and now with the delay proposed, the bottom fell out of the breakaway market, specifically those advisors joining RIAs,” said DeVoe.

Despite 2017 getting off to a blistering start with 45 RIA transactions, transaction volume quickly softened as the fiduciary rule lagged.

Advisors consider the fiduciary rule a burden because its makes it harder and more expensive for them to sell products into retirement accounts.

Distributors at all levels over the past 18 months have looked to merge, form alliances and create partnerships with other firms to survive. But with the reprieve in the rule’s implementation, advisors don’t feel quite so pressured.

The expiration of seven-year forgivable loans from wirehouses made in the wake of the financial crisis to retain advisors caused RIA mergers and acquisitions to surge in 2015 and 2016. The drop may indicate a reversion to the mean as well.

RIAs will continue to leave or break away from wirehouses and broker-dealers as many of the reasons to do so remain, “but this latest surge of activity is likely behind us,” DeVoe wrote.

Advisors often flee to the independent channel in search of more control and what they claim is an ability to serve clients more efficiently.

Average assets under management of the breakaway seller hit a low of $312 million in the first three quarters compared to $483 million for 2016.

Established RIA Activity In-Line With Expectations

Mergers and acquisitions volume of “established” or SEC-registered RIAs in the third quarter dipped to 19 transactions from 20 transactions in the year-ago quarter.

In the first quarter, there were 23 established RIA transactions and in the second quarter there were also 23 transactions, the survey found.

Transaction volume of established RIAs is “in line with the historical average and in itself does not create an immediate concern,” DeVoe wrote.

Average assets under management among established RIAs sellers dropped to $706 million in the first three quarters of this year compared with $1.1 billion last year, the survey found.

Deal Book research 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 cyril.tuohy@innfeedback.com.

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