When it comes to mergers and acquisitions of RIAs, much attention has rightly been given to “rollup” or consolidator firms like Focus Financial, United Capital and Dynasty. But the latest data published Feb. 9 in the Nuveen/DeVoe RIA Deal Book reveals another face of the consolidator trend: sub-acquisitions by those consoiidators’ partner RIA firms accounted for 12% (or 19) of all 142 deals last year, and 22% of established RIA firm transactions in 2016, amounting to a “breakout year for sub-acquisitions.” The average size of those acquired RIA firms was over $1 billion in AUM.

Why? Consolidators, said DeVoe in an interview, are more interested in acquiring RIA firms with $1 billion or more in AUM, but the “expertise and capital” of their parent firms “ennable their affiliates to make acquisitions,” particularly of RIA firms in the $100 million to $500 million in AUM space. The number of deals by those affiliate firms has “nearly quadrupled since 2014,” according to DeVoe. “Buckingham [Asset Management] has done 20; Colony [The Colony Group] has done six.” Both are Focus Financial firms.

“Sub-acquisitions have become an important extension of many consolidators’ M&A strategies,” the Deal Book reports, “enabling the parent to accelerate growth while engaging a segment of the market that otherwise would not have been an efficient use of time.”

That doesn’t suggest that the consolidators don’t remain active buyers — “the megadeals have been pretty consistent over time” — but at least over the past year, RIA acquisitions showed more of a “barbell effect,” DeVoe said, with both large firms and small firms being acquired but with acquirers taking “a breather” on firms in the $500 million to $1 billion space.

But those midsize firms, suggested DeVoe, will account for a larger percentage of acquistions over the next few years. Those firms “go through a fair amount of change” as they grow, often hiring a business development officer and a COO along the way and acquiring some scale. But as they approach the $1 billion in AUM mark, advisory firm owners who “think they can sell to the next generation” will realize their growth makes it less likely that the next generation can afford to buy the firm. So, DeVoe says, “over time this will be one of the most active segments” among advisory firms’ M&A. “The continued procrastination of the RIA community to execute succession planning,” he argues, “will likely force a surge of unanticipated sales in the future.”

That’s regrettable, says DeVoe, since “it’s the most important decision an advisory firm owner will make” in their business lives, and they’ll find themselves “negotiating with ‘M&A ninjas’ who’ve done 50 or 100 of these” acquisitions.

DeVoe recommends that advisor owners “hire an expert” to help them make the right decision and understand the “hundreds of variables in the deal structure.” Valuation of firms “gets so much attention” from advisors while to many sellers’ eventual disappointment, “deal structure gets so much less” attention, he says. 

“Part of our job,” says DeVoe of his M&A consulting firm DeVoe & Co., “is that we’re therapists with spreadsheets.” The RIA firm owner “is selling their baby,” so there’s an “emotional letting go” taking place. During negotiations on an RIA transaction “shiny objects” may prove either distracting or even offensive to the seller, but for the good of “all the constituents” in a deal — including clients and staff — it’s important to “manage the emotions on all sides” to make the best possible deal. As for the future, the report says that on the seller side, “RIA owners are being more open and strategic with their decisions to sell. Scale matters in today’s more competitive marketplace, and scale can be achieved quickly through mergers. Advisors are using M&A to increase the breadth of services, expand geographic footprints, and decrease the risk and headaches related to compliance and technology.” On the buyer side, “the momentum of consolidators will be accelerated by their sub-acquisition activity.”

DeVoe says “over the next 5-10 years I expect RIA M&A activity to continue to grow.” However, while breakaway brokers joining existing RIAs remains an active market, he thinks it’s a possibility there “may be a slowdown in 2017.” Many transactions over the past two years with breakaways were “driven by forgivable loans written in 2008-2009” by wirehouses and other employee broker firms, “so that vintage has been expiring.”

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