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 recently, citing research from Devoe & Company.
At the same time, a Nationwide-commissioned survey reveals that nearly 60% of RIAs and fee-based advisors expect industry M&A to increase over the next 12 months, down from close to 70% in last year’s survey — the first time in five years that respondents have been less bullish about the pace of transactions and down from a peak of 70% in 2017, Nationwide said. This suggests some advisors could be concerned 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 anticipate greater market volatility over the next 12 months, and 56% worry about a U.S. bear market emerging over that period, followed closely by 54% who fear 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,” Hawley explained. “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.”
Harris Poll conducted an online survey from Feb. 15 to March 4 among 507 RIAs and 514 broker-dealers in the United States, and among 824 investors with household investable assets ranging from $100,000 to $5 million or more.
Attitude Counts Fifty-one percent of advisors in the survey say 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 shows advisors are 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 have pointed to these deals as a way to find greater resources to serve their clients and greater resources to expand and scale their businesses. RIAs and fee-based advisors who indicate positive sentiment about M&A activity also say such transactions allow them to create a succession plan and increase opportunities to sell their businesses.
Nationwide says that its study has shown that the most successful advisors — those who earn more than $500,000 or individually have $250 million or more in AUM — eagerly adapt to industry trends such as M&As to benefit the growth of their firms. This year’s poll shows that the level of successful advisors who expect the RIA industry’s M&A activity to increase has declined by only four percentage points to 71% in 2019 from 75% in 2018.
Nationwide says 31% of successful advisors in 2019 view M&A activity as having a positive effect because it increases opportunities to buy another practice, compared with 26% of all RIAs and fee-based advisors who say this.
Challenges & Concerns Only 12% of RIAs and fee-based advisors express negative sentiment about the effect of consolidation and M&A activity on their businesses in the next 12 months, the same as in last year’s survey. This year, 33% of those who were negative generally prefer to manage their business independently without oversight, compared with 20% who said this in 2018.
Reach Michael S. Fischer at firstname.lastname@example.org.