Mergers and acquisitions in the RIA space are on track to set another annual record, but the exact number of deals done year to date is open to interpretation.

Echelon Partners reports there were 43 “consummated transactions” for the third quarter, bringing the total year-to-date number to 137. DeVoe & Co. is reporting 40 deals for Q3 and a year-to-date total of 123.

Both firms operate as investment bankers and consultants to RIA firms and neither publishes a complete list, so it’s difficult to understand why their deal totals differ so widely, especially because both include only deals involving domestic firms with assets under management of $100 million or more.  

Still, both firms agree that by year end the total number of M&A deals will exceed last year’s totals — 168 for Echelon Partners and 147 for DeVoe & Co. Echelon is forecasting 183 deals by year-end. DeVoe & Co. doesn’t forecast a number but doesn’t expect a blockbuster year.

The third quarter of 2018 included some very big deals in the RIA space, among them Focus Financial’s acquisitions of Loring Ward ($17 billion in AUM) and Edge Capital Group  ($3.5 billion in AUM) following the consolidator’s IPO in July and Fifth Third Bank’s acquisition of Franklin Street Partners ($2.2 billion in AUM).

The average deal size topped $1.5 billion, according to Echelon, which includes Genstar Capital’s majority stake of the Cetera Financial Group, which has $224.5 billion in AUM, in its tally. That deal was valued at about $1.7 billion, according to Bloomberg.

DeVoe & Co., which excludes Genstar’s Cetera deal from its count because Cetera is an independent broker-dealer rather than an RIA, has the average deal size at just under $1 billion.

Both firms, however, agree that $1 billion-plus AUM firms are not the only desired targets.

Strategic buyers and consolidators remained the biggest acquirers of RIA firms, but private equity, which also has stakes in some strategic buyers and consolidators, was also a factor as well as banks, which seem to be making a small comeback into a market they once dominated.

The sellers included firms whose owners are nearing retirement and want to slow down but stay in the business for several more years and firms with younger owners, often midsize with assets under $1 billion, who want to scale up.

“They feel they would have a higher win rate if they had more resources,” says Dan Seivert, CEO Of Echelon Partners.

Such sellers “want to gain scale to run a better business and focus their time and energy on what they’re good at … getting administrative duties off their plate,” says David DeVoe, managing director and founder of his eponymous firm.

Both DeVoe and Seivert say they’re seeing more deals with down payments of 50% of more but where DeVoe sees deal terms getting better for sellers, Seivert says they favor buyers who aren’t paying full price.

“Buyers are usually going fast, forcing sellers to not have enough time to be discriminating on deal terms,” says Seivert. “Sellers think they know their overall valuation but they aren’t always considering the value when the firms are brought together.”

Looking ahead, both Seivert and DeVoe are optimistic that M&A activity in the RIA space will remain vibrant, including not just targets with $1 billion or more in AUM but midsize firms with several hundred million in assets, unless the economy and stock market turn sharply weaker.

“Sellers are cognizant that they’ve had a great run and that with each month there’s more risk of an inflection point,” says Seivert. “There’s nothing in the economic fundamentals that would suggest a slowing down yet, but external factors involving global trade, third-world debt or some calamity on the political scene could.”

“With no key structural changes to the underpinnings of M&A drivers, we still expect RIA M&A activity to increase significantly to dramatically over the next five to seven years,” says DeVoe in his report. “Succession planning (or lack thereof) and the power of scale will continue to drive advisors to sell or merge.”

But if the stock market and economy reverses course, the three big factors that underpin RIA valuation — growth, profitability and risk — could be affected, says DeVoe. It happened in 2008 during the financial crisis. Profitability turned from a positive 20% to negative and “the risk profile was off the charts,” he says.

— Check out RIAs Need to Prepare for Growth and Asset Surge: Echelon on ThinkAdvisor.