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RIA M&A Activity for This Year Already Higher Than 2018

High valuations, the lure of scale and a strong stable of thoroughbred acquirers are driving the activity.

The registered investment advisor channel had a record number of mergers and acquisitions during the third quarter, with a total of 36 deals, according to DeVoe & Company’s RIA Deal Book report.

High valuations, the lure of scale and a strong stable of thoroughbred acquirers are driving the activity.

“The current volume leaves no doubt that 2019 will be the industry’s sixth successive record year of activity,” said David DeVoe, managing director at DeVoe & Company. “This acceleration of activity is healthy for the industry. Even at 100 to 150 transactions per year, the M&A activity is less than half of what it should be for an industry with over 10,000 firms.”

The number of third quarter deals surpasses the previous record of 33, which was set in the second quarter of this year. The 12-month trailing average is 33 deals, according to DeVoe. With a quarter still to go, the 2019 transaction count already surpassed the full 2018 RIA M&A volume of 100.

Smaller transactions, or those involving assets under management of $250 million to $500 million, comprised over 50% of the deal volume in the third quarter, DeVoe said, in an interview with Indeed, there have been 55 such transactions year to date, far above the entire year of 2018 and more than double the number just a few years ago.

This has been driven by a number of factors, he said. On the buy side, a number of firms, including Mercer, Wealth Enhancement Group and Buckingham Asset Management, are “almost specializing in supporting advisors” of that size, he said. Meanwhile, on the sell side, “more advisors are thinking through how to take their company to the next level” and grow in size and scale, he said.

Firms of this size are typically at a unique stage in their life cycle. They have usually moved beyond the advisory practice/sole-practitioner stage and have created an RIA business–a true business that is no longer fully dependent on an individual/founder. However, to break through this phase, they are faced with a daunting next step: creating a professionally managed firm, which is not easy. These firms need to execute a new set of management activities, such as hiring executives, restructuring the organization and migrating responsibilities. Owners of these firms must also have the appetite to accept near-term lower profits and cede control over a variety of responsibilities to a growing number of specialists and senior executives.

DeVoe said these smaller firms have a few options; they can remain in the RIA business stage, try to grow into a professionally managed firm, or take the leap and merge into a larger organization. The latter has become the most popular option, he said.

DeVoe added that there has been a “new surge in capital” flowing into the RIA space. More innovation and capital lending solutions, he said, have entered the space in the past 10 months than over the 17 years he has been involved with industry M&A.

“It started with SBA loans, but then we have seen private equity and unique private equity-like firms like family offices making investments or new startups that are creating revenue-share models: there is just a whole variety of different options,” he said. The proliferation of options will help many second generation advisors take over founders’ businesses, he said.

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