2019 could be classified another boring year in the RIA, or Registered Investment Advisor market. That’s because the market set another M&A deal volume record. And industry execs don’t see a letup with these mergers and acquisitions any time soon.
They see a strong demand from quality buyers, high valuations, the ready availability of capital at low interest rates, soaring client assets, and a track record of successful M&A deals over the past 10 years.
Reports of Record Highs in M&A Deal Volume for 2019
Several leading investment and consulting firms tracked record highs in 2019 M&A deal volume. Echelon Partners and DeVoe & Co., along with FA Insights, and Fidelity all found that the year was a record high in M&A deal volume. Echelon recorded 203 acquisitions—a 12% increase from the 181 deals the firm reported a year earlier. That’s a pace of roughly 17 per month. The tally represents a 12.2% increase over last year’s record level, and a 15.4% compound annual growth rate (CAGR) over the past five years.
The firm’s annual Deal Report acknowledges that its records convey a somewhat imprecise snapshot of monitoring deals for advisory firms. To that end, the firms estimates that as many as two-thirds of RIA transactions for firms with under $100 million are not even reported.
Echelon saw 57 M&A transactions for wealth management firms with over $1 billion in assets in 2019, which is almost an 80% increase from 2018. Private equity investors, fast-growing RIAs, and large financial institutions continued to command M&A deal volume. RIAs backed by Focus Financial Partners and Wealth Partners Capital Group together made up more than 30 transactions. These two firms were the most active buyers. Mercer Advisors (11 deals), Wealth Enhancement Group (6), Mariner Wealth Advisors (5), Captrust (4), and Hightower Advisors (4) complete the list of the other large acquirers.
Market Trends Identified
Echelon reports that 2019’s deals represent four trends, which include (i) consolidation among the largest firms; (ii) a heightened private equity interest in the independent broker dealer industry; (iii) a race to build a robust WealthTECH product suite; and (iv) the aggregation of retirement planning assets.
The 2019 Echelon RIA M&A Deal Report noted several key takeaways and trends that it found most impactful in its analysis of deal-making in 2019, along with what to expect in the future.
Here’s an analysis of the three major areas of activity in 2019:
Wealth Management Deal Volume
Last year, activity in wealth management transactions was especially high in the second and fourth quarters. The year’s record total shows that, despite heightened valuations and market volatility, structural forces in the market continue to drive deals to completion.
Firms are continuing to see the benefits of consolidation rather than an independent strategy. Larger firms see the benefit of cost savings and have improved resources to invest in the latest technology. They also find it easier to recruit talent.
And although deal volume was monopolized by strategic buyers like Focus Financial and Mercer Advisors, the largest deals were made by private equity investors and large financial institutions.
Breakaway Deal Volume
With the definition of this activity broadening to include more than only those instances in which an advisor is leaving a wirehouse, Echelon says that there’s a blurring of what constitutes a “breakaway” and what doesn’t. Another factor is the amount of equity that must change hands for a breakaway to become more of a true M&A transaction.
Nonetheless, breakaway activity increased for the second straight year, with a new record set for the number of annual deals in this category. There were a reported 655 breakaways recorded last year—a 21.7% increase over 2018 and a 40% increase over 2015 (the previous record year). The increased breakaway activity has been credited to a few key industry factors. These include the expiration of forgivable loans issued to advisors during the 2008 financial crisis and the lessening of fears concerning some wirehouses removing themselves from the longstanding broker protocol within the past few years.
Echelon reports the biggest winners as far as asset gains from breakaways included Wells Fargo Advisors Financial Network ($19.8 BN) and Raymond James Financial Services ($18.6 BN). Those that suffered the most asset losses from breakaways included Wells Fargo Clearing Services ($70.3 BN) and Morgan Stanley ($24.5 BN).
WealthTECH Deal Activity
As mentioned above, there’s a race to create the most complete WealthTECH product suite by the best capitalized strategics, along with an increase in partnership and white-label rollouts versus a buy and/or build strategy. The advisor community’s continued quest to improve client experience via technology also continues to be a key factor moving the deal volume forward.
Deals and partnerships between traditional wealth management platforms (and other financial institutions) and pure play WealthTECH businesses are still driving the increased technological adoption rates across the industry. This will continue to upgrade the end-consumers experience. There’s also healthy capital raising activity for startups, who are generating interest from a variety of investors, including venture capital, growth equity funds, and strategic investors.
Echelon reported the most prominent deals of the year involved strategic investors such as BlackRock, Broadridge Financial Solutions, Invesco, and Envestnet, who bolstered their WealthTECH service offerings with M&A.
The Deal Volume Forecast for 2020
Size, scale, and large buyers are also expected to continue to drive the market, experts say. Consulting and M&A provider DeVoe & Co., which will soon release its 2019 M&A report, anticipates a continuation of 30-plus transactions per quarter in 2020.
DeVoe says that record high valuations, more capital options, and the increasing power of “mega-RIA firms” may drive deal activity to more than 40 transactions in a quarter this year. DeVoe noted that already in January 2020, there have been 12 transactions in the first half of the month, compared to six at the same time in 2019.