Registered Investment Advisor (RIA) mergers and acquisitions may be hitting record highs, but a review of those numbers indicates there are still too few transactions among retiring advisors.
That means a projected rise in the supply of RIAs over the next few years. Here’s how the numbers work out, according to David DeVoe, a San Francisco-based expert in RIA mergers and acquisitions.
If one assumes that the typical RIA owner runs his or her company for about 25 years, starting the firm when he or she is about 40 and retiring at 65, that yields a churn rate of about 4 percent a year.
Given there are 4,165 RIAs with more than $100 million in assets under management, about 167 RIAs would then be exiting the business annually, DeVoe said.
But studies show that only 25 percent of RIAs have a written succession plan. So of those 167 RIAs, only 42 will have an internal succession plan in place, leaving 125 RIAs that need to be sold to an external buyer.
Last year, of the record 123 RIA transactions, only 34 transactions took place where advisors were exiting the industry through the sale to an external buyer, according to DeVoe’s extrapolations.
“What this means to me is in 2015, if this math is accurate and I think to a degree it’s conservative, 86 transactions should have occurred outside of what actually occurred,” said DeVoe in a client webinar last week.
Calculating backward, there are about 80 RIAs of more than $100 million in AUM every year that need to be sold among the universe of 4,165 RIAs to maintain a churn rate of 4 percent and renew the advisor base.
Every year during which the 80 or so RIAs aren’t sold means an increasing backlog and more supply, he said.
Advisors who want to sell internally should do put a plan in place now to give successors two or three more years to build up equity in the RIA.
“The longer you wait to put a succession plan in place, the more likely it is to fail or to have a challenger for you to have to sell externally,” said DeVoe, founder and managing partner of DeVoe & Co.
More “robust” buyers need to come into the industry as well, he said.
Recently, banks have become more active in RIA acquisitions and the purchase of stakes in RIAs by private equity companies Hellman & Friedman, Genstar Capital, Lightyear Capital and TA Associates should be seen as a vote of confidence in the RIA industry.
“We’re going to need more buyers that are open and willing and capitalized, and have the expertise to go out and acquire firms because, I expect, just as we’ve been seeing these numbers increase over the last couple years, we’re going to see an acceleration of transactions,” he said.
M&A of RIAs soared to a record 123 transactions in 2015, a 37 percent increase over the previous year, and the number of “megadeals” involving RIAs with $5 billion or more outpaced overall RIA transaction growth, according DeVoe’s research.
The 123 transactions among RIAs in 2015 was more than double the 58 transactions recorded in 2013, according to DeVoe & Co.
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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