Merger and acquisition activity in the RIA industry in 2018 increased by 20% over the previous year’s high-water mark, setting a record for the fifth consecutive year, Nationwide Advisory Solutions reported Wednesday, citing outside research.
At the same time, a Nationwide-commissioned survey found that 59% of RIAs and fee-based advisors expected industry M&A to increase over the next 12 months, down from 68% in last year’s survey — the first time in five years respondents were less bullish about the pace of transactions and down from a peak of 70% in 2017, Nationwide said.
This suggests, it said, there may be concern that issues with the market and the economy are eroding valuations and decreasing opportunities for transactions.
In fact, 56% of RIAs and fee-based advisors anticipated greater market volatility over the next 12 months, and 56% expressed concern about a U.S. bear market over that period, followed closely by 54% who worried about a U.S. economic recession.
“Since launching our Advisor Authority study in 2015, a growing number of RIAs and fee-based advisors were saying that M&A activity would increase — so this year’s sharp reversal in the trend could be an indicator of greater uncertainty about the market and the economy,” according to Craig Hawley, head of Nationwide Advisory Solutions.
“But at the same time that RIAs and fee-based advisors are less bullish about the pace of consolidation and M&A activity, the majority still say that these deals will have a positive impact on their business. Consolidation among firms is driven by a variety of factors — including increasing competition, rising fee compression, the need for greater scale, as well as succession planning for a generation of older advisors.”
The Harris Poll conducted an online survey within the U.S. from Feb. 15 to March 4 among 507 RIAs and 514 broker-dealers, and among 824 investors with household investable assets ranging from $100,000 to $5 million or more.
Fifty-one percent of advisors in the survey said M&A would positively affect their business, reflecting a slight upward trend in recent years — 51% in 2018, 49% in 2017 and 47% in 2016.
Nationwide said sentiment surrounding M&A activity in the RIA industry consistently showed that advisors were focused on delivering excellent service in their clients’ best interest and achieving greater scale.
Year over year, advisors who reported feeling positive about the effect of M&A activity on their business in the next 12 months cited greater resources to serve their clients and greater resources to expand and scale their businesses.
In addition, RIAs and fee-based advisors who indicated positive sentiment about the effect of M&A activity were somewhat likelier to say it allowed them to create a succession plan and it increased opportunities to sell their business.
But they were slightly less likely to say it increased opportunities to buy another practice.
Nationwide said that year over year, its annual study has shown that the most successful advisors — those who earn more than $500,000 or individually have $250 million or more in assets under management — eagerly adapt to industry trends such as M&A to benefit the growth of their firm.
They are more optimistic than all advisors about the pace of M&A and its effect on their practice to tap into greater potential. This year’s study showed that the successful advisors who expected RIA industry M&A to increase declined by only four percentage points to 71% in 2019 from 75% in 2018, following 76% in 2017, 73% in 2016 and 77% in 2015.
According to the survey, successful advisors were likelier than all RIAs and fee-based advisors to say that M&A would positively affect their business. Successful advisors who expressed positive sentiment also said the top reasons were greater resources to serve their clients and greater resources to expand and scale their businesses.
Nationwide said it was notable that in 2019, 31% of successful advisors said M&A activity had a positive effect because it increased opportunities to buy another practice, compared with 26% of all RIAs and fee-based advisors who said this, while 25% said it increased opportunities to sell their business, versus 27% of the overall sample.
Challenges and Concerns
Only 12% of RIAs and fee-based advisors expressed negative sentiment about the effect of consolidation and M&A activity on their business in the next 12 months, the same as in last year’s survey.
This year, 33% of those who were negative said the top reason was a preference to manage their business independently without oversight, compared with 20% who said this in 2018, 19% in 2017 and 22% in 2016. In prior years, the number-one reason cited by those who felt negative was the challenges of competing as a small independent firm.
Year over year, Nationwide said, increased pressure to “sell” products that might not be right for clients has also been cited among the top three factors for negative sentiment about the effect of M&A.
“There is an industry-wide shift toward a fee-based model as more investors demand personalized, holistic financial advice that is in their best interest,” Hawley said. “Our findings show that overall, RIAs and fee-based advisors believe consolidation and M&A creates more opportunity for independent shops and is not synonymous with increasing pressure to compromise their fiduciary standard.”
— Check out United Capital Scoops Up 2 RIAs With $800M on ThinkAdvisor.