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Breakaways Take ‘Dramatic’ Dive Post-DOL Rule

By Murray Coleman November 7, 2017

Dealmaking activity among RIAs slowed in the third quarter to its lowest level in nearly three years, according to a new report on U.S. mergers and acquisitions.

The market analysis of RIAs with $100 million or more in client assets, both tuck-ins and firm-wide deals, found a “dramatic” and “unexpected” slip in volume, says David DeVoe. His investment banking and research firm, DeVoe & Co., issued its latest research on domestic activities in conjunction with Nuveen on Tuesday.

“M&A volume had been increasing at a record pace in the first half of 2017,” DeVoe tells FA-IQ. “Now it’s a question mark whether we’ll see a third-straight record year.”

Driving a decline in past months has been a “significant and steady” slowdown in wirehouse brokers breaking away to join rival independent broker-dealers and RIAs, according to DeVoe. “The third-quarter deceleration of RIA M&A activity was driven nearly exclusively by a sharp decrease in breakaway activity,” notes the analyst’s newly issued RIA Deal Book report.

In Q3 just 10 breakaway movements between $100 million and $5 billion in assets were recorded, DeVoe says. That’s about half of what might be considered a normal quarter's worth of activity, he adds.

In the past, expiration of forgivable loans at wirehouses and major brokerages came together to produce notable upticks in advisors switching firms. Now, despite partial implementation of the DOL rule in June, DeVoe and his research team view market caution as reaching a sort of crescendo in the last fully reported quarter.

Indeed, the RIA Deal Book pegs activity as peaking in Q4 of 2016. That came shortly after the Department of Labor proposed its new rule to invoke a fiduciary standard on retirement planning. A proposal was put before Congress in January 2017 to delay the rule; the next month President Donald Trump issued a memorandum to push implementation back six months.

In August, the DOL filed a court document proposing an 18-month delay. That request to push back full implementation to July 2019 was made official last week, according to reports.

“As it became clear the DOL rule’s implementation would be delayed or scrapped, the M&A market took a clear fall,” DeVoe says. “Now that the winds of regulatory change are slowing, so is the rate of brokerge-based advisors looking for new homes.”

In such an environment of regulatory uncertainty, he estimates breakaway advisors joining RIAs might be facing a “new normal” of around 40 to 50 transactions a year. That would represent a nearly 50% drop from recent cycles.

David DeVoe

Established RIAs who are selling or merging should remain more stable and resistant to short-term events, DeVoe predicts. He expects such levels to average around 80 to 100 deals a year if current conditions prevail. “This is a part of M&A activity that is most likely to keep increasing at a steady rate,” he says.

Even so, his analysis covering the initial three quarters of 2017 finds that deal sizes for an average seller appeared “stuck” around $700 million in assets under management – more than 30% lower than last year’s typical transaction.

So far in 2017 a total of 114 deals had been cut through September, DeVoe reports. By comparison, he calculates that last year during the same period 108 transactions took place.

Serial acquirers, as DeVoe calls them – like Mercer and United Capital – are likely to keep gaining steam. His firm's report identifies 22 transactions from serial acquirers this year through September, which “nearly” matches 2016’s complete M&A total.

A bright spot in RIA M&A is also likely to be “consolidators” who’ve been active market participants over the past several years like HighTower and Focus Financial Partners, DeVoe adds.

“More broadly, one wonders if the swollen balance sheets of private equity, banks and consolidators and their interest in the independent space could unleash a string of mega-deals and large acquisitions,” his report says.

For a variety of reasons, DeVoe believes that "a migration of breakaways to the RIA model" isn't going away anytime soon. "But this latest surge of activity," he concludes, "is likely behind us."