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RIA M&As at Record High But There Are Red Flags

By Garrett Keyes January 28, 2019

RIA M&A deals jumped by 20% to a record high of 176 transactions in 2018, but more than half of those were among “established RIAs,” according to a report published this month by wealth management consulting firm DeVoe & Company.

Despite the total number of M&A deals rising – up from 147 in 2017 and 143 in 2016 – the report notes that the “established RIA M&A trend line had a lumbering increase” in 2018.

Descriptors like “blockbuster, epic and steep no longer apply to RIA M&A,” the DeVoe report states.

M&As among established RIAs – which the study defines as those with more than $100 million in assets under management – rose by 9% to 97 transactions in 2018 from 89 transactions in 2017. In 2016, there were 78 established RIA M&As.

David DeVoe, managing partner of the consulting firm, tells FA-IQ that the established RIA M&A numbers don’t reflect the potential for such transactions.

David DeVoe

“The industry should see two to three times the number of transactions” DeVoe says, referring to the established M&A RIAs.

DeVoe expects the potential established RIA M&A deals to “spike to a point where there aren’t enough buyers to absorb all of the sellers.”

If that happens, he says “firm valuations will get compressed, buyers will become pickier, the quality of sellers will decrease, margins will compress, and deal structures will be altered.”

There may even be situations where “some sellers can’t sell.”

To help potential sellers navigate the future M&A environment – assuming DeVoe & Company’s expectation of a seller’s market prevails – the consulting firm recommends that RIA owners and principals take the following steps:

  • If you don’t have a written succession plan, put one in place immediately.
  • If you plan to sell internally, then ensure that the math works. Model the sales of shares over time, calculating an increasing valuation each year, and determine if it’s feasible for the next gen to afford the firm.
  • If you plan to sell externally, don’t try to time the market, but be thoughtful about the timing of your sale. Realize that if there is another “2008,” valuations will be compressed for three to five years. Or if 200-300 firms sell in a given year, your sale may be delayed for years – by your decision or by lack of buyers.
  • If you are curious about acquiring firms, then make the commitment to become a buyer – or don’t. Ultimately, additional buyers will be healthy for the industry. But acquiring an RIA – and even preparing to become a serious buyer candidate – is an intensive undertaking. In many cases, RIAs are better off allocating their energy to other initiatives. So, make a decision with conviction.

Meanwhile, the report reveals scale is becoming increasingly important to RIA firms.

More than $500 billion in AUM changed hands in 2018, “driven by some of the largest transactions in recent history,” the study notes. The 10 largest deals of 2018 accounted for almost $400 billion in assets – a quarter more than 2017’s nearly $300 billion and more than five times larger than 2016’s total.

And scale will matter more and more going forward, DeVoe says. “When RIAs reach certain levels of scale they can achieve more as an organization.”

For example, Mercer Advisors vice chairman and M&A leader David Barton told FA-IQ the firm purchased $150 million hybrid RIA McDermott Advisory Group last year in part to build its East Coast presence.