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RIA M&A Deals Set Record High (Again) in 2018: Echelon Partners

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Unlike the stock market, which took a sharp turn to the downside in late 2018, the M&A market for RIA deals continued its strong momentum to finish the year setting a new record high.

A total 181 deals were completed — a sixth consecutive annual high — representing roughly $369 billion in assets under management, according to Echelon Partners, an investment bank. The average transaction size topped $1.3 billion, almost a third larger than the average deal size a year ago and close to 18% of the deals had $1 billion in more in AUM.

“RIA M&A deal activity did not show signs of weakening in 2018; on the contrary, it strengthened, which could be an indication that RIA executives are looking to hasten plans for liquidity events ahead of what could be an impending recessionary environment,” according to  Echelon.

Consolidators dominated the 2018 deals, continuing a recent trend, led by Focus Financial, with 21, followed by Mercer Advisors (8) and Captrust (4). Consolidators or strategic buyers accounted for 47% of the deals in 2018, followed by RIA firms themselves (28%), other firms (14%) and banks (11%), which have accounted for the smallest share in the RIA M&A space since 2012.

The share of RIA acquirers fell substantially in 2018, down from 36% in 2017. Echelon said the decline was “likely due to well-capitalized and sophisticated strategic buyers or consolidators aggressively entering the space and winning deals.”

A key example of the ascendance of such strategic buyers was the purchase of Hilliard Lyons, with $50 billion in AUM, by Robert W. Baird & Co., the biggest deal by AUM in the fourth quarter.

Looking ahead, Echelon expects continued strong M&A activity for RIAs in 2019, supported by a more “dovish” Federal Reserve, which suggests that financing for potential buyers would remain “feasible.”

“Prevailing industry forces signal a continuation of this trend beyond 2018 as history indicates consolidation will quicken prior to the economic cycle turning over,” according to Echelon.

Breakaway activity also increased in 2018, rising to 537, or 27% above the 2017 total, supported by advisors observing the success of their breakaway peers. Over one-quarter of the 2018 breakaways occurred in the fourth quarter, supported by dissatisfaction with working at wirehouses.

This trend of increasing breakaways, however, could slow because of increased market volatility, wavering valuations and rising fears of recession, according to Echelon, as advisors become “weary of taking on additional risk.”

TD Ameritrade, like Echelon, also reported a record year for M&A activity in the RIA space, but it recounts just 88 deals. Unlike the Echelon report, TD Ameritrade excludes deals involving IBDs and those that result from new internal succession arrangements.

The total number of deals is probably much larger than what Echelon Partners reports because there is a “hidden deal market” estimated to be three to four times larger that isn’t even on Echelon’s radar, according to Managing Director Carolyn Armitage.

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