Mergers and acquisitions in the RIA market are on pace to set another record in 2019.
Year to date through Aug. 31, the number of deals involving firms with between $100 million and $20 billion in assets under management reached 86, up 43% from the same period a year ago and just one deal shy of the 87 that occurred in all of 2018, according to a new report from Fidelity Investments.
The cumulative AUM involved in these 2019 deals totaled $93.5 billion, also up 40% from a year ago. (The total excludes Goldman Sachs’ acquisition of United Capital because it involved assets of approximately $25 billion, which exceeds Fidelity’s definition of wealth management firms, which tops out at $20 billion.)
Focus Financial Partners led the number of transactions with 19 deals through August, most involving AUM below $500 million, though a few, including deals with Foster Dykema Cabot & Co., Lodestar Investment Council, Steinberg Global Asset Management, and Williams, Jones & Associates, involved AUMs of more than than $1 billion each.
Fidelity considers Focus a “strategic aggregator,” which typically involves a firm taking a majority ownership interest in an RIA but the RIA retains its own name under Form ADV.
Mercer Advisors, Mariner Wealth, HighTower Advisors, Wealth Partners Capital Group, Captrust and Wealth Enhancement Group were also active investors in RIA firms this year but the number of their deals were in the low to mid-single digits. Fidelity considers these firms “branded acquirers,” taking a significant majority to 100% interest in RIA firms, which subsequently operate under the acquirer’s name and ADV.
Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody, told an audience of financial advisors at the firm’s recent Inside Track conference in New York that total M&A transactions in the RIA space could reach 129 this year, involving $140 billion in assets. He explained that the fourth quarter tends to be very active for M&A activity in the RIA space.
“There is a large, growing ecosystem” in the RIA space, attracting deals, Slater said.
“Buyers are competing in a seller’s market,” Slater told ThinkAdvisor. And sellers are looking for deals to help scale up their businesses, attract new talent and finance increasingly complex technological updates as well as compliance requirements and succession plans.
Given the growing demand for outside companies to acquire or take an equity interest in RIA firms, sellers can now get more cash upfront, up to 50% to 75% of the purchase price, which reduces the risk of self-financing a deal and achieves earlier liquidity, said Slater.
Rick D’Amico, co-founder and partner at Merchant Investment Management, which provides strategic capital to the wealth management industry, told the audience of financial advisors that RIA firms now have access to multiple sources of capital, including the capital of other RIA firms, strategic and branded aggregators and private equity and private debt as well as Small Business Administration loans and bank loans.
He advised RIA firms seeking outside funding to know the purpose for that capital and to consider the risks in taking on a capital partner.
“Equity is permanent,” said D’Amico. He recommended that RIA firms consider the culture of a partner or acquiring firm — “probably the most overlooked thing” — and how that relationship could impact the retention of employees and clients.
RIAs interested in loan financing should consider community banks. “Local community banks will be the cheapest source of capital … and loans are not dilutive,” D’Amico said. Their lending rates will depend on an advisor’s personal guarantee, said D’Amico.
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