Deal volume in the wealth management industry slowed in the second quarter, but the dampened activity is not expected to persist, according to one report.
There were 32 mergers and acquisitions involving registered investment advisory firms in the second quarter of 2018, down from 49 in the first quarter, according to DeVoe & Company, an investment bank and consulting firm focused on the wealth management and investment management businesses.
The slump, during a quarter that is generally one of the strongest, was largely due to fewer deals by what DeVoe & Co. calls “established RIAs,” or those with at least $100 million in assets under management. The 14 deals involving established firms accounted for less than half of all transactions and was down 32 percent from the 3-year quarterly average.
Meanwhile, advisors and advisory groups leaving either a brokerage, an independent brokerage or another RIA with at least $100 million AUM accounted for 18 transactions, on pace with recent quarters, according to the report.
Deals are also getting larger. In 2018, the AUM of RIA sellers has been up 21 percent compared to 2017. Excluding some mega deals, like private equity firm Hellman & Friedman buying the publicly traded Financial Engines, most RIA sellers with less than $5 billion in AUM were still managing an average of more than $1.14 billion in 2018.
Still, DeVoe & Co. Managing Partner David DeVoe characterized the second quarter as an exception and expects recent trends to continue. The fragmented wealth management industry is consolidating—and drawing increasing interest from private equity firms—but DeVoe and observers agree that its maturation is still in the early stages. At some point, the market will be “picked over” but that period is still far away, he said.
It’s also possible that deal activity wasn’t as muted at the report indicates. A number of boutique investment banks and consultants publish quarterly merger and acquisition reports that are similar but rarely identical. Echelon Partners recently published a report that tallied 48 deals in the second quarter. PricewaterhouseCoopers’ second quarterly report “U.S. Financial Services Deals Insights” counted only 12, though the types of firms differs in each report.
A significant number of advisors polled by DeVoe & Co. are also open to discussing the sale of a stake in their firm to an external partner. Only 27 percent of advisors said they were open to a discussion about selling a stake of their firm to an external party 2 years ago, but 45 percent said they would be open to the same discussion today.
DeVoe said the openness to a sale involving an external buyer is a reflection of RIAs seeking benefits of scale. Until recently, most sales were a derivative of a firm’s succession plan rather than a strategic decision, he said.
Other things that might have impacted deal activity in the second quarter were markets and charges to corporate taxes in 2018.
DeVoe said that while market volatility would not substantially affect the valuation of an RIA, deal exploration and execution often take a back seat to running the business. Also, during market volatility, clients and their portfolios require more time and attention from principals.
He added that the number of deals in the first quarter of 2018 were also high, perhaps because firms that were considering a sale at the end of 2017 held off until this year because of the tax implications.