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September 09, 2019 at 02:06 PM
RIAs expect M&A activity within their sector will continue to increase for more than five years as high valuations are playing a major role in bringing more of them to the negotiating table, DeVoe & Co. said Monday.
Nearly 40% of RIA principals report that those valuations are affecting their decisions on whether to consider selling their firms, according to the latest DeVoe RIA M&A Outlook Study. For respondents from firms with more than $1.5 billion in assets under management, the number jumped to a much higher 62%, it said.
Sixty percent of respondents said they expected RIA M&A activity to continue growing for more than five years, according to DeVoe & Co. Advisors in the $1 billion-$3 billion segment of the sector had an even more upbeat projection as 74% of the principals at those RIAs predicted the momentum would continue for the next five years, the report said.
Industry dynamics that pointed to the continued RIA M&A activity included advisor age, rising costs and the ability for consolidators and private equity firms to continue their interest in acquisition, according to DeVoe & Co.
The willingness of RIAs to sell their firms to an external party jumped significantly from just two years ago, with 50% of respondents saying they were open to it now versus only 33% indicating in this year’s survey that they were open to that option just two years ago.
As announced in the Q2 DeVoe RIA Deal Book, RIA valuations have reached an all-time industry high. The average seller size (excluding transactions over $5 billion) ended Q2 at $821 million, that report said, adding acquisitions of RIAs with $250 million to $500 million increased momentum with 27 transactions, representing 42% of all transactions in the first half of 2019.
“Record valuation levels are not lost on RIAs as they contemplate potential sale timing and the possibility of expediting plans,” according to David DeVoe, managing director at DeVoe & Co. “We know that advisors don’t put economics as the top decision driver,” he said in a statement Monday, but added, “it’s still a factor.”
The report also painted a gloomy picture for the potential of internal transition at RIA firms across the sector as only 32% of RIAs indicated they were confident that next-gen advisors at their firms could afford to buy out the founders.
“There’s a new revelation that succession planning needs to start much earlier to account for timeframes when next-gen advisors can work up to an ownership stake,” according to DeVoe. “If advisors wait too long, an external sale often becomes the only answer, like it or not,” he said in his firm’s announcement about the new study’s findings.
