RIA transactions continued to increase in 2016, according to two recently released analyses, signaling a healthy, maturing industry.
In an analysis of RIA M&A activity by San Francisco-based Charles Schwab Advisor Services, total deal value increased to $136 billion in 2016 from $115 billion in 2015, a 17 percent increase. Over two years, deal value increased 186 percent from $47 billion in 2014.
“We see mergers and acquisitions as a subset and sub-story of the growth of the independent advisory industry in general -- as the RIA channel becomes more successful, M&A activity is going to follow suit,” says Jon Beatty of Schwab. “Advisors are merging for multiple reasons, whether it be demographics and succession, scale and efficiency, geographic strategies, or just building durability and a long-term business model.”
In the recent RIA DealBook pubished by Manhattan Beach, Calif.-based Echelon Partners, $144 billion in RIA M&A activity was measured in 2016, up from $112 billion in 2015.
According to Schwab, 41 percent of 2016’s RIA acquisitions were conducted by other RIAs, with another 29 percent conducted by strategic acquiring firms -- indicating that succession is a primary driver of M&A activity, says Beatty. “If an advisor is looking for continuity in their business model, they’re more likely to seek a similarly minded operator for those purposes.”
Echelon's analysis found 138 transactions in 2016, a number it believed to be low. Nevertheless, RIA M&A activity has grown by 10 percent over the year, from 125 transactions in 2015.
“The topline story is that while deals are at an all-time high, the numbers of deals are dramatically underreported; there’s at least four-to-five times more activity than we’re reporting,” says Carolyn Armitage, managing director at Echelon Partners. “Still, activity has grown by around 16 percent annually over the last seven to eight years; moving forward, we believe steady growth averaging around 10 percent should continue.”
According to Echelon, there should be approximately 160 reported deals in 2017, with the aging advisor workforce and advisor retirement in particular driving the rising levels of M&A activity.
Other factors contributing to the rise in transactions include an increased availability in financing, growth in peer-to-peer deals among advisors, market cycle timing, increased deal assistance and greater seller knowledge.
“There’s probably 5 percent of the overall marketplace that’s represented by professional buyers, the other 90 to 95 percent are unsophisticated and they’re kind of bumbling their way through the process,” Armitage says. “There are a lot more astute, knowledgeable sellers in the marketplace than most people understand, but they get discouraged by these buyers who are ‘tirekickers,’ who really don’t know what they’re doing, but want to acquire assets. For the sellers, it’s important to find the right fit, so they tend to be more invested in the process.”
Echelon found that 42 percent of the total acquisitions were conducted by RIAs, with another 40 percent conducted by strategic acquirers or consolidators - -yet private equity firms were responsible for 40 percent, or $199 billion of the total AUM volume of deals in 2016.
In addition, Echelon reported 19 transactions involving “wealthTECH” firms, financial technology firms oriented towards wealth management and financial planning, with many of these deals involving sales to traditional financial services companies. Almost half of the wealthTECH transactions in 2016 involved corporate purchases of or investments in robo-advisors.
“You’re going to see many new entrants into fintech and wealthTECH as people find creative ways to digitally solve manual processes, and better ways to influence with clients,” says Armitage. “There are a lot of opportunistic buyers and acquirers in this space beyond financial services. All of Wall Street has their eyes on the fintech sector. They see an opportunity to flip these acquisitions in a few years.”
In total, Schwab reported on 94 deals in 2016, up 12 percent from 84 deals in 2014, and up 74 percent from 54 deals reported in 2014. In 2016, deal volume skewed heavily to the first quarter, when 31 transactions took place.