What’s on your mind?

In the course of my conversations with RIAs across the country, the number-one answer to that question invariably comes back to the idea that they are looking for help in navigating the wave of merger and acquisition (M&A) transactions washing over the RIA landscape.

It’s no wonder why M&A is top-of-mind among RIAs. The accelerating pace of industry consolidation shows no signs of letting up anytime soon. Given the deal-making activity in the first half of this year, 2017 is on track to become the third consecutive record-setting year for RIA M&A transactions.

The numbers tell the story:

  • 82 M&A deals took place during the first six months of 2017, up 15% from 71 in the same period a year ago;
  • 38 M&As occurred in 2Q17, about the same as the year-earlier period;
  • 2Q17 was the fifth consecutive quarter of 35 or more M&A transactions and the 11th straight of 30 or more;
  • Transactions in the three-month period of 2Q17 involved more than $100 billion of assets under management (AUM).

According to the RIA consulting firm DeVoe and Co., which compiled the numbers above, “the supply of sellers will continue to increase over the next several years.”1

The good news for those RIA firms who may be testing the waters on the M&A front is that they are likelyto find plenty of deep-pocket buyers, ranging from banks to consolidators to other RIA firms. Even private equity (PE) firms are getting in the game and increasingly supplying capital to back the buying strategies of some of the mega wealth management firms such as Carson Wealth and Mercer Advisors.

Mercer alone, which announced its acquisition of Blue Moon Wealth Advisory and another almost $100 billion of AUM, has made eight acquisitions in the past 18 months. CEO David Welling said in a recent interview that Mercer is in talks with dozens of other advisory firms and hopes to double its AUM over the next four years.2

Factors Driving M&A Momentum

Many advisors we speak with, large and small alike, have merging, acquiring or being acquired on their minds. All are at different inflection points. Some are looking for an infusion of capital or inorganic growth, while others may be breaking away or transitioning from a large broker-dealer or seeking a synergistic partner.

The reasons to sell or buy may be unique to each advisor’s specific situation, but several recurring general themes seem to underlie their thought processes. In a rapidly evolving industry, these include issues such as fee compression, the changing demographics of the financial-advice business, regulatory considerations, and succession planning.

We’re also seeing a more highly competitive landscape and rising costs for essentials such as robust information technology capabilities and research. In addition, as the marketplace has become more complex, RIAs are now required to have broader subject-matter expertise. It wasn’t too long ago that they just needed to be specialists in equities and bonds. Today, they have to be able to navigate everything from more traditional equity and fixed income offerings, all the way to private equity and other alternative investments.

New Realities

In today’s environment, large custodians such as Schwab, Fidelity and Pershing, as well as well-funded outsourced chief investment officer (OCIO) and aggregator types such as Mercer, Dynasty, and Hightower, are all major drivers of the increase in M&A. Many have the necessary assets, some by an influx of PE capital, and are able to offer smaller RIAs new platforms and opportunities.

That is resonating with many advisors for a variety of reasons. Some want to move away from the wirehouses and are exploring independent channels. Others want to facilitate the transition from the firm’s founders. Often these are Baby Boomers who have had successful careers and now want to plan for succession and lay the foundation for a sustainable business with a new generation of leaders.

Added to the mix are the hurdles an advisor faces if he or she wants to go independent. The competitive landscape is difficult and the start-up costs – for information technology, research, compliance, marketing, recruiting, just to name a few – can be prohibitive. As a result, many advisors view being acquired or tucked into an existing large-scale RIA firm as an efficient way to achieve their personal, professional, and financial goals, and overcome the hurdles associated with being independent. They also see it as a way to provide better service to their clients.

Against this backdrop, Schwab reported three years ago that, for the first time ever, it was helping more advisors join existing RIA practices than setting up as independents.3 That trend is accelerating today, as evidenced by the record numbers of RIA M&A transactions. I believe factors such as fee compression, the Labor Department’s Fiduciary Rule, and others will continue to drive advisors to existing RIA firms, and new independent practices will become increasingly rare going forward.

We can look to the retail industry as an analog. Family-owned neighborhood shops are being put out of business by large national chains. A few boutiques may survive and even thrive, but it is harder and harder to stay independent and small. The same is equally true in the RIA industry.

The question then becomes: How should an RIA that may be considering an acquisition or merger, best prepare? We’ll explore the answers in my next blog installment.

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  1. ^Source: “Record RIA M&A Activity in First Half of 2017,” DeVoe & Company.
  2. ^Source: “Mercer’s Expansion Picks Up Pace with $100M Deal,” FinancialPlanning, 8/16/17.
  3. ^Source: The Cerulli Report: “U.S. Intermediary Distribution 2016.”