Anticipated fiduciary regulations from the Labor Department set off a “roller coaster” of breakaway advisor activity last year, and the anticipated legal implications of high-profile exits from the Protocol for Broker Recruiting could impact M&A this year, according to the latest Nuveen/DeVoe RIA Deal Book.

“RIA M&A activity continued its momentum, but the pace of acquisitions slowed from a sprint to a light jog,” David DeVoe, managing partner at DeVoe & Company, said in a statement. “Although the breakaway advisor activity has and will be whipsawed by external drivers, the underpinnings of established RIA sales essentially remain unchanged.”

The latest edition of the Nuveen/DeVoe RIA Deal Book shows that the RIA industry experienced its fourth-successive record year of merger and acquisition activity in 2017: 153 transactions were tracked during the year, a 6% increase over last year’s high-water mark of 145.

Of the 153 transactions in 2017, 44% were teams and individuals who left wirehouses, IBDs or RIAs to join RIAs. While this percentage is in line with historical averages, DeVoe says the breakaway advisor activity was a roller coaster throughout the year, affected by anticipated regulations related to the DOL fiduciary rule and anticipated legal implications related to the broker protocol.

“Seeking to free themselves from their employers’ new administrative burdens, breakaway advisors left wirehouses, IBDs and other companies to join less regulatory-laden RIAs, creating a short-term surge in early-year activity,” according to DeVoe.

However, this wave stopped abruptly when the Trump administration delayed the fiduciary rule’s implementation. This resulted in a 50% drop in the movement of breakaways joining RIAs in last two quarters.

Meanwhile, DeVoe says he’s only begun to see the impact of wirehouses withdrawing from the broker protocol. According to DeVoe, the exits of Morgan Stanley, UBS and Citigroup have set the stage for a “potential exodus” of wirehouses and other corporations from the protocol.

“As a result, a number of captive advisors and brokers are accelerating their exits and engaging with experts to explore leaving ahead of additional protocol defections,” DeVoe reports.

The number of breakaway advisors joining RIAs likely will “spike” during the first several months of 2018, as advisors move quickly to exit before their employer potentially withdraws from the accord and creates greater risk associated with taking clients to a new organization, according to the report.

“If additional firms continue to withdraw from the pact, as anticipated, the industry will likely experience a decrease in breakaway activity over the midterm,” according to DeVoe. The tax code overhaul that President Donald Trump signed late last year will impact advisors in several ways — but is unlikely to have a significant impact on RIA M&A volume, according to the Deal Book.

“The new tax treatment affects both income and sale proceeds, thereby creating a double-edged sword on the trade-offs between ‘continuing to run the business’ vs. [sale],” the report says. “Consequently, there isn’t a clear dominant tax incentive for one decision over the other.”

FA Insight’s Update

Similar results were revealed in the latest FA Insight M&A Activity Update, provided by TD Ameritrade Institutional. M&A activity was strong in the first three quarters of 2017, but weakened late in the year: The number of deals targeting independent advisory firms falling by 10, or 13%, from 2016 to 70 in 2017.

Many advisors told FA Insight that they “fielded a surge in client calls and meetings concerning the impact of a sweeping tax bill. At the same time, some acquirers that have engaged in multiple deals paused to secure new capital,” according to the report.

The total volume of assets acquired grew by 32% to $114 billion in 2017, though. Plus, the average deal size jumped 35% to $434 million.

“The latest numbers suggest buyers are targeting larger firms,” said FA Insight, which has been tracking industry M&A activity since 2000. A growing number of RIA acquirers are choosing to “move upstream” and pursue bigger targets or have turned to M&A as their primary growth strategy.

—Janet Levaux contributed to this report.