Mergers and acquisitions (M&As) among registered investment advisor (RIA) firms increased 23% in the third quarter compared to the previous year, according to investment banking firm ECHELON Partners. In addition, due to decreasing bonuses at wirehouses in light of the Department of Labor’s (DOL’s) fiduciary rule, more RIAs are breaking away from wirehouses; year-to-date through the end of the third quarter, there have been 302 RIA breakaways, with an additional 88 expected in the fourth quarter.
ECHELON notes that wirehouses had been giving advisers recruiting bonuses of
200% to 400% of gross revenue with a duration of seven to 10 years. Since the
passage of the fiduciary rule, “this activity has come under fire and usage is
decreasing. As a result, breakaway volume remains high,” ECHELON says.
The average size of breakaways year-to-date is $318 million, up 7.1% from 2016, and there have been 15 deals valued at $1 billion or more, according to ECHELON. Private equity investors are also beginning to purchase RIAs, the bank says, with the $100 billion acquisition of Focus Financial by KKR and Stonepoint Capital being one of the industry’s biggest deals.
However, among all RIA deals, the average transaction size is $1.1 billion—the highest of the past seven years. As ECHELON says in its third quarter M&A deal report, “billion-dollar-plus-AUM [assets under management] firms often provide buyers with an established business infrastructure and a proven ability to generate consistent cash flows—and, more importantly, profits.”
“The aging adviser population combined with consolidation at the top end of the industry is leading to increasing volumes of deals, both in total numbers as well as in assets,” says Dan Sievert, chief executive officer of ECHELON. “Our research is projecting a continued increase in M&A activity across the board.”
Well-capitalized consolidators have accounted for 53% of RIA purchases so far in 2017, a 33% increase from 2016.
In its report ECHELON notes that “the process of
becoming an RIA is continually becoming a non-capital intensive one, and is
affording more and more of the benefits that wirehouses used to enjoy dominance
over, such as technological capabilities.” ECHELON’s full report can be