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Tax Overhaul Caused Slowdown in M&A: FA Insight

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Advisory firms were on pace last year to set new records in merger and acquisition activity until they hit the pause button in the fourth quarter — likely because lawmakers’ efforts to overhaul the tax code led to a surge of client meetings.

According to the latest FA Insight M&A Activity Update on advisory firm M&A trends, the number of mergers or acquisitions targeting independent advisory firms dropped to 70, compared with 80 in 2016.

The report from TD Ameritrade Institutional, which acquired FA Insight in 2016, gathers transaction data from news outlets, press releases and other secondary research sources. Its M&A database includes publicly announced transactions involving the acquisition or merger of an independent advisory firm serving households or individual clients, and which manages at least $50 million in assets or generates at least $500,000 in annual revenue.

While the number of deals was on pace to beat 2016 results, a halt late in the year resulted in the number of deals targeting independent advisory firms falling by 10-13%.

What was the reason for this slowdown? The report says numerous forces may have had an impact on activity levels — among them the tax overhaul.

“Many advisors cite being distracted late in the year with client concerns related to tax reform, while some ‘multi-dealers’ — those firms that have engaged in at least three deals in the past five years — appear to have been in the process of securing capital to fuel acquisitions for the coming year,” the report states.

According to the report, market forces suggest the slowdown is likely only temporary. M&A activity will likely pick up thanks to “the demand for succession solutions, coupled with healthy firm profits and security market growth.”

In fact, there have already been a flurry of announcements in the first weeks of 2018, according to Vanessa Oligino, who as director of Business Performance Solutions at TD Ameritrade Institutional oversees FA Insight.

“Advisors took care of their clients during a time of uncertainty, but we expect M&A activity to resume its recent, heightened pace in 2018,” Oligino said in a statement. “Indeed, we’ve already seen 12 transactions announced just in the first three weeks of January.”

In contrast to the year’s decrease in total transactions, the volume of assets under management related to these transactions increased markedly. In 2017, total AUM of all acquired or merged firms summed to $113.5 billion — up 32% versus 2016 and the third-highest annual AUM deal total, according to the report.

The average deal-size also increased — by 35% from 2016 — to $434 million in 2017.

According to FA Insight, the latest numbers suggest buyers are targeting larger firms.

“This suggests that the more experienced dealmakers may be moving upstream, applying lessons learned from earlier transactions and now positioning to add value to even larger acquisitions,” the report states.

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