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And they're off! Early RIA M&A activity sets blistering pace

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Mergers and acquisitions for financial advisory firms in 2018 are off to a blistering start after a slowdown in activity for the fourth quarter.

TD Ameritrade's FA Insight research unit has recorded 12 announced transactions for the first three weeks of January alone, surpassing the 10 deals it recorded for the entire fourth quarter of 2017.

January deals included two more acquisitions by Genstar Capital-owned Mercer Advisors and another deal by Lightyear Capital, a major private equity player in the RIA market. Greg Friedman, who recently sold his Junxure CRM firm for $20 million, was also busy, merging his San Francisco Bay-area RIA, Private Ocean, with Lakeview Financial Group in Seattle.

"The first quarter of 2018 looks like it will be pretty robust," says Dan Inveen, a consultant for TD Ameritrade and co-founder of FA Insight, now owned by the custodian. "While the early part of the year usually tends to be active, there are indications that what we're seeing this year goes beyond the usual cyclical uptick.”

"There's now clarity with regard to the tax code and multideal acquirers are well-stocked after receiving significant funding last year," Inveen adds. "There's also continued motivation to achieve scale, efficiencies and lower costs. You also have the same old market factors of aging advisors and attractive businesses that generate recurring revenues. And people know that appreciating securities markets won't last forever, so some think this be a good time to get out."
Matt Cooper, president of Beacon Pointe Advisors in Newport Beach, California is also bullish on RIA M&A prospects this year.

"For total assets and deal size, it’ll probably be a record year," Cooper says, noting the positive impact of the new tax law and a continued flow of private equity money in the industry to spark activity.

"There’s a tremendous amount of capital in private equity funds that needs to be put to work," he says. "We get approached constantly, five to six times a year. That’s up from zero times a year five years ago."

Banks, according to Inveen, are also set to be big players in 2018.

"We saw an uptick in bank M&A activity last year," he says. "They're clearly back in the game and have healthier balance sheets. And they continue to have interest in diversifying their revenue streams away from interest-based businesses."

Both Inveen and Cooper see a major market correction as the biggest threat to derail M&A activity.

Cooper, however, thinks the odds of a bull market pullback are slim: "not more than 20%," he says. "The Feds are very cognizant of not inverting the yield curve."

The 10 deals recorded for last year's fourth quarter by the latest FA Insight M&A Activity Update compares to 23 transactions for the fourth quarter in 2016 and 60 deals for the previous three quarters in 2017.

"RIAs may have been focused on interpreting the new tax initiative and working closely with their clients towards the end of last year, precluding them from M&A initiatives," Inveen says. "And some of the major firms who received capital funding may have been more focused on re-loading than making deals."

FA Insight's preliminary data for RIA M&A deals in 2017 shows 70 transaction announcements, a 13% decline from 80 recorded deals the prior year. Those figures, however, are far below those published by other industry researchers, which showed record M&A activity in 2017.

DeVoe & Co.'s RIA Deal Book recorded 153 M&A deals in 2017, up from 145 transactions in 2016. Echelon Partners' RIA M&A Deal Report posted 168 deals in 2017, an increase of 22% over the 138 transactions in 2016.

Inveen says the comparisons are not "apples to apples" based on FA Insight criteria for deals, which limits its research coverage to RIAs or independent trust companies with at least $50 million in AUM or firms generating at least $500,000 in annual revenue. In addition, FA Insight does not include internal transitions of ownerships, breakaway broker transitions or teams of RIA advisors splitting off to join other firms as tuck-ins.

DeVoe & Co. and Echelon include breakaway brokers joining established RIAs in their M&A data, and both firms use $100 million in RIA AUM as a starting point for tracking deals. Echelon also includes "tuck-ins, shareholder spin-offs, capital infusions, consolidations and restructurings" of RIAs and hybrid firms in its data.

A list of top 15 M&A transactions in 2017 with $1 billion or more in Echelon's most recent RIA M&A Deal Report included Dynasty Financial Partners as a "buyer" of a UBS Financial Services breakaway team starting its own RIA and Geller Family Office Services. Dynasty is an outsourcing provider of integrated platform services that partnered with the two firms. The inclusion of the transactions on the list was in error and not included in Echelon's 2017 M&A data, says Echelon CEO Dan Seivert.

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