A circle eating a triangle “Deep-pocketed players made bold moves, contributing to continued consolidation at the top of the industry,” according to DeVoe & Co. (Image: Allison Bell/TA)

Despite the zig-zag motions of the stock market toward the end of 2018, RIAs are upbeat for 2019, according to a recent TD Ameritrade Institutional 2019 Sentiment survey. One sign of positivity is the record number of mergers and acquisitions executed in 2018, according to DeVoe & Co. Both reports found optimism in the RIA community, yet with some caution.

The market volatility in the last quarter of the year might have been a boon to RIAs, who reported growth of nearly 20% in assets and revenue in 2018, according to TD Ameritrade.

“In times of market uncertainty, investors seek out financial guidance from knowledgeable professionals,” said Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional, in a statement.

The telephone survey of 302 independent RIAs was taken between Nov. 27, 2018 and Dec. 13, 2018, a period of high volatility in the stock market. Despite the swoons, the RIAs were positive, with 63% stating they were optimistic about the U.S. economy for the near term, while 47% . That said, slightly less than half of RIAs, 47%, said they were optimistic about the global economy, and the same number said they expected stock prices to continue to increase.

The TD study found that on average, RIA assets and firm revenue grew by 18% in the latter half of 2018, while number of new clients increased by 14%. About a third said new clients left commission-based platforms in favor of independent, fee-based fiduciary advice. Half believe they will grow faster next year.

Other findings of the survey included:

  • The health care sector will benefit the most from the incoming Congress, with staples, IT and financials also getting some “lift.”
  • Cannabis-related stock interest is hot as 48% of RIAs reported client interest in that sector, while 45% reported client interest in investments focused on environmental, social and governance factors. However, cryptocurrencies are not getting love, with only 15% of respondents reporting any client interest.
  • Client referrals still are the top driver of RIA growth, although digital marketing with traditional methods fueled new business growth as well.
  • Cybersecurity is the most important issue facing the industry and should be a top concern for regulators, most RIAs stated. Technology remains the biggest management challenge.

‘Epic Final Quarter’ for M&A

The optimism found in the TD survey was mirrored in DeVoe’s 2018 recap of M&A activity in the RIA business. In 2018, there were 176 transactions, a 20% increase from 2017, according to the DeVoe report. During the volatile fourth quarter, there were a record 54 transactions — twice the number from the fourth quarter of 2017  — or what DeVoe called “an epic final quarter.”

The average size of these deals for “established RIAs” was just under $5 billion; the group had 97 transactions in 2018, a record.

“Breakaway advisors” with over $100 million grew in number and “accounted for the bulk of the overall increase in RIA M&A activity,” the report stated.

What made 2018 M&A deals stand out were their size, according to DeVoe, stating that “a staggering” $513 billion in assets under management changed hands, “primarily driven by some of the largest transactions in history.”

Source: DeVoe & Co.

The top 10 deals of the year made up $391 billion of the AUM, a jump of 24% over the previous year. “Deep-pocketed players made bold moves, contributing to continued consolidation at the top of the industry,” the report stated. The largest deal was the private equity firm Hellman & Friedman’s purchase of Financial Engines, which it merged with Edelman Financial Services. DeVoe notes that consolidators and RIAs were the major acquires, buying up 81% of the established RIAs that were for sale.

The report also stated that the average acquisition size for established RIAs — excluding deals above $5 billion — hovered around $1 billion.

But this party may not continue, warned DeVoe, as stripping away the breakaway advisor deals shows a less impressive growth picture, stating, “a somewhat flat M&A chart for a hyper-fragmented industry with all the characteristics of the RIA space should be alarming to us all.” It notes that sellers will outstrip the capacity of buyers. “Ultimately, this scenario is good for buyers, but not particularly healthy for the industry overall,” the report states.

DeVoe sees consolidation at the top and predicts that these mega-firms will “grow faster and perform better than the rest of the industry.” Nonetheless, it says, smaller firm will still be able to compete, it just will be harder.

M&A Push

The TD Ameritrade Institutional 2018 RIA M&A Year-End Update by FA Insight also had some key findings  Pete Dorsey, TD Ameritrade Institutional managing director, Sales and Advisor Management, says of the findings, “The stars have aligned for advisor M&A: There’s abundant capital, many principals are nearing retirement age, and firms are seeking avenues to sustain growth. We don’t see these factors going away anytime soon.”

 Some of its key findings include:

  • RIA mergers and acquisitions activity jumped 24% in 2018 to a record high 88 announced transactions.
  • In the past four years (2015–2018), nearly twice as many transactions were announced than in the preceding four years (2011–2014)
  • RIAs are leading the way, initiating 72% of deals in 2018 (vs 46% in 2017)
  • Six acquirers, each announcing at least four deals, accounted for 38% of all 2018 deals
  • Q4 2018 was the second most active quarter on record, surpasses only by q1 2018 (as predicted in our Jan 2018 announcement)
  • Total AUM associated with target firms fell to $93B, (3rd highest ever) but median deal size was $423M.

 “We’re seeing the emergence of national investment advisory firms that combine the virtues of an independent RIA with the scalability and financial resources of a wirehouse,” Dorsey added.

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