Merger and acquisition activity in the advisory space will continue to heat up, with experts in the field agreeing that industry consolidation is taking hold.
“You have [had] a lot of transactional activity in the wirehouse space — that’s been going on for many, many years,” said Elliot Weissbluth, CEO and founder of RIA consolidator HighTower, during the DeVoe M&A + Succession Summit held in Miami Beach in December. “We’re now starting to see over the past couple years a real increase in M&A activity in the RIA space.”
“Strong momentum” in the number of deals has been exhibited over the last couple of years after a “tumultuous history” of deals dropping dramatically in 2008 and 2009 and eventually coming back in “a jagged manner,” said David DeVoe, managing director of DeVoe & Co., who spoke at the DeVoe summit.
The deal volume in 2017 was on track “to be yet another record year,” DeVoe said. “I expect we probably will break through that third successive record year of M&A activity,” with the industry experiencing over the next five to seven years “a steady and intensely strong surge” of M&A activity. “We’re hitting that inflection point where this industry actually will start to consolidate, and potentially consolidate aggressively,” he added.
What’s driving the activity? Advisors’ succession planning needs, according to DeVoe, plus the fact that advisors “over the last two years have merged or sold to gain the benefits of scale more than I’ve seen in the last 50 years.”
Indeed, according to the Nuveen/DeVoe Deal Book, RIA merger and acquisition activity got off to a record start in 2017, with 44 transactions executed in the first quarter. The transaction volume increased a steep 29% over the 34 deals tracked during the same period in 2016, according to the DeVoe Deal Book.
“The first quarter of 2017 was the most active quarter ever of mergers and acquisitions in the RIA industry,” said DeVoe. “Advisors are selling and merging to gain the benefits of scale in an increasingly competitive marketplace.”
DeVoe’s second quarter 2017 Deal Book found the following:
Mega-deals were back in Q2, pushing the AUM transacted to the rarified air of over $100 billion in a three-month period.
The industry experienced an interesting shift in the composition of Buyer Categories as banks sustained newfound interest in acquisitions, and RIAs moved toward the sidelines.
RIAs as a Buyer Category dropped from 29% of the acquisitions to an alarming low of 22% during the period, a surprising development given the number of RIAs who have capital and are focused on acquiring.
Beginning of Consolidation
Weissbluth stated that the advisory industry is “at the very beginning of consolidation,” and that “it’s for all very good reasons.”
Looking ahead, “you’re going to see aggregation” in the RIA space, Weissbluth asserted. “Statistically, if you look at the total volume of deals and activity, there’s a volume of transaction activity that is trending upwards.”
But another trend is emerging: “The number of ‘aggregator’ firms that are in the business — like us, actually consummating serial transactions — is starting to increase,” Weissbluth said.
In separate comments to IA, Weissbluth said that HighTower isn’t worried about increased competition in the aggregator space, “because of the size of the overall opportunity, the fact we have a differentiated platform, compelling brand, client and advisory centric service culture and access to capital.”
What’s more, he continued, “Trillions of dollars in assets are expected to migrate into the fee-based RIA space over the next five years, and today, aggregators represent less than 2% of the marketplace.”
Since launching in 2007, HighTower has performed over 100 transactions, and in late October the firm received an infusion of capital when private equity firm Thomas H. Lee Partners took a large stake in the firm and injected $100 million in new capital. HighTower has approximately $50 billion in assets and close to 190 RIAs.
In a question-and-answer session at the summit with Brian Hamburger, MarketCounsel’s CEO and founder, Weissbluth explained that HighTower’s need for capital was twofold.
“One was to provide internal liquidity, to recapitalize our internal shareholder base to allow those that wanted to sell the opportunity to sell, and we wanted to bring in growth capital,” Weissbluth said. “We not only successfully recapitalized our internal shareholder base — those folks [who] had been with us for a while [and wanted] the opportunity to sell that investment — but we brought in $100 million of fresh capital to grow the business.”
The “thesis” behind the HighTower/THL combination, he continued, was to service the “marketplace out there of financial advisors [who] are working in RIAs that are not getting the benefits of size, scale, brand, culture — a potpourri of things. The smaller companies are having a hard time competing, and frankly it’s not fair.”
HighTower’s goal is to “level the playing field between a financial advisor who’s been running an awesome fiduciary business for years, but has been struggling to keep up with the larger firms that have more money and more resources,” Weissbluth said. “We’ve leveled that playing field almost instantaneously when we transact with a registered investment advisory firm.”
While finding help dealing with the Department of Labor’s fiduciary rule is why firms look to larger partners, another reason is succession planning, said the executive. “We’re seeing more and more advisors starting to think about succession planning, and as they’re thinking about what that means from a liquidity perspective, they’re finding a liquidity partner,” he said. “We’re having a lot of good conversations where we’re a provider of liquidity.”
After being queried by a MarketCounsel conference attendee about the future of the broker-dealer model, Ric Edelman, executive chairman of Edelman Financial Services, gave a blunt response. “Where’s the broker-dealer model going?” Edelman said in a rhetorical response to the conference attendee’s question. “On the one hand they’re dinosaurs, they’re completely obsolete; the commission-based business is gone. It’s already history in England and Australia, and it won’t be very long before commissions are eliminated here in the United States by law or regulations. The broker-dealer world is toast; they’re history.”
Having said that: “They’re some of the smartest people in the financial services industry. Do you really think Jamie Dimon is going to sit there and say, ‘OMG, I guess we’ve got to close shop?’”
Broker-dealers “are going to figure this out. Don’t be shocked if they reinvent themselves as RIAs, instantaneously becoming the multi-trillion dollar RIA model. The notion of the broker-dealer as transaction and commission based [is changing, and] they are reinventing themselves,” Edelman continued. “[At] Schwab right now, less than 15% of its revenue is commission based.”
The bottom line for BDs: “Consider them not dinosaurs, consider them phoenixes,” he said. “They’re going to reinvent themselves, be a massive competitive threat to you and me, and will be among the big aggregators.”