While the fundamentals that propelled the RIA M&A market to record heights last year remain in place, a repeat performance in 2018 is hardly assured.

A set of external factors including the Broker Protocol, the new tax law, market performance and the fate of the fiduciary rule will have an outsized impact on acquisition activity, says M&A consultant David DeVoe.

"The structural changes that are driving the sales of RIAs and the natural consolidation of the industry have not changed, and M&A momentum is likely to continue," DeVoe says. "But the impact of developments like the tax law and how brokers will react to changes in the Broker Protocol remains uncertain."

To be sure, the M&A market had few impediments in 2017.

DeVoe & Co. recorded a record 153 RIA transactions, a 6% increase over the previous high of 145 deals in 2016. The majority of last years' M&A activity occurred in the year's six months, however, as growth dropped off by 26% in the third and fourth quarters.

Deals for smaller firms with between $100 million and $250 million in AUM and sub-acquisitions by affiliates of RIA consolidators dominated transactions in 2017, according to DeVoe & Co.'s RIA Deal Book. As a result, the average AUM of established RIA sellers declined to $881 million last year from a record high of just over $1 billion in 2016.

Teams and individuals who left wirehouses, IBDs or advisory firms to join RIAs made up nearly half of transactions in 2017.

But breakaway activity appeared to be dictated by anticipated regulations related to the Department of Labor’s fiduciary rule and legal implications of the unraveling Broker Protocol, both factors which will also be consequential in 2018, according to DeVoe.

Breakaway advisors left wirehouses, IBDs and other companies to join less regulatory-laden RIAs, the Deal Book report says, "creating a short-term surge in early-year activity. But this wave stopped abruptly when the Trump administration delayed the fiduciary rule’s implementation and left its future in question."

As DeVoe put it, the potential breakaways were "struggling with expectations connected to the new rule and when that went away they exhaled and stayed put."

Similarly, the abandonment of the Broker Protocol by major wirehouses, with the expectation of more to come, caused many brokers to "sprint for the exits," last year, according to DeVoe.

If — as expected — more firms withdraw from the Broker Protocol, David DeVoe sees "a dampening effect" on breakaway activity.

"The number of breakaway advisors joining RIAs will likely spike during the first several months of 2018, as advisors move quickly to exit before their employer potentially withdraws from the accord and creates greater risk associated with taking clients to a new organization," the DeVoe report states.

But if — as expected — more firms withdraw from the pact, DeVoe sees "a dampening effect" on breakaway activity for the rest of the year as the legal burdens of transferring clients becomes more onerous.

While the Tax Cuts and Jobs Act of 2017 doesn't provide clear tax incentives to either buy or sell an RIA, it nevertheless bears watching, says DeVoe.

Because RIA owners will pay a maximum of 37% personal income tax under the new law, combined with changes in state and local tax and mortgage interest deductions provisions, owners of RIAs who live in states with high taxes and expensive housing markets like New York and California "are the biggest losers in this new tax world," according to the report.

But the fact that the new law reduces corporate tax rates to 21% may make RIAs an attractive arbitrage play for buyers like banks, potentially leading to higher valuations, DeVoe says.

"It's too early to tell, but banks, which re-entered the market last year, may have more of an incentive to buy, and they will have more capital to employ if interest rates increase," DeVoe says.

The stock market remains the biggest M&A variable.

The rising revenue and profits resulting from a bull market have lessened the incentive for some RIA owners to sell, but are causing others to consider unloading.

"If you're thinking strategically, you're wondering how much longer a nine-year bull market has left and right now is a pretty darn good time to sell," DeVoe notes.

Conversely, a market correction or crash would likely depress RIA valuations and sales, he adds.

Smaller firms are likely to continue being prime acquisition targets.

"Factors like aging demographics, lack of succession plans and the need for scale are all in play and there more small firms than larger ones," says DeVoe. "The underpinnings are there for this part of the market to grow dramatically."

Consolidators such as Focus Financial Advisors and United Capital, who accounted for one third of M&A deals last year, will also remain formidable players, according to DeVoe, but face stiff competition from other deep-pocketed buyers.

"It will be more important for consolidators to articulate the value they bring to the seller," he says. "Advisors are not selling just to get a check in this environment. They're looking to improve their business, so you need to have a good story to tell."

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