Merger and acquisition activity between RIAs hit a record pace in 2017, but is growing at a slower pace than in previous years, according to research performed by DeVoe & Company.
While a record 153 transactions occurred during 2017, a 6 percent increase from the 2016 total of 2016, merger and acquisition activity slowed by 26 percent through the second half of the year according to DeVoe’s 2017 RIA Deal Book.
According to DeVoe, the third and fourth quarters showed the lowest levels of M&A activity that the RIA industry has seen for nearly two years.
As with previous reports, more than two-fifths of the transactions involved teams and individuals leaving wirehouses, independent broker-dealers and other independent advisory firms to join RIAs.
DeVoe reports that early in the year, as broker-dealer representatives anticipated the enforcement of the Department of Labor’s fiduciary rule, there was a surge of advisors leaving wirehouses and broker-dealers for the RIA channel, but the movement of breakaways slowed by more than 50 percent over the last two quarters of 2017.
According to the RIA Deal Book, 86 established RIAs were sold during 2017, exceeding 2016’s total of 79. However, RIA sales slowed in the last quarter of the year, as only 15 transactions were recorded. RIA consolidators conducted half of the year’s RIA purchases, while other RIAs were responsible for 31 percent of the transactions. Banks accounted for 8 percent of the purchases.
The average size of RIA sales declined from more than $1 billion in 2016 to $881 million n 2017, but more mega-RIAs were involved in transactions. The number of RIAs sold with assets of $5 billion or more increased from four in 2016 to 10 in 2017, while the sales of small RIAs with $100 million to $250 million AUM grew from 54 in 2016 to 67 in 2017.
The exit of firms like Citigroup, Morgan Stanley and UBS from the Broker Protocol is leading many captive advisors and brokers to accelerate their exits, and DeVoe expects the trend to increase breakways in the early months of 2018.
Moving into 2018, DeVoe expects that the reformed U.S. tax laws will have little net effect on RIA merger and acquisition activity. Because of exceptions written into the law, most RIA owners will pay taxes at a 37 percent rate instead of the new 21 percent corporate rate. The report notes that owning RIAs within a corporate structure may become more attractive as corporations might be willing to pay higher valuations than other potential acquirers.
With high valuations, a stable and growing economy, and a large pool of qualified buyers counterbalancing the threat of a market correction, DeVoe expects that merger and acquisition activity will maintain its pace with some volatility over the short- and mid-terms.