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The next hot M&A target? Solo advisors

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Often overlooked, solo advisors now appear to be the belles of the M&A ball.

Over 60% of RIAs who are considering an M&A transaction over the next five years plan to acquire a solo advisor, and 47% would like to take over a smaller firm's client accounts by buying its book of business, according to a survey of RIAs by FA Insight, a division of TD Ameritrade Institutional.

The aging advisor population is driving both supply and demand for the practices and clients of aging advisors, says Vanessa Oligino, TD Ameritrade's director of business performance solutions.

But solo advisors and small firms who haven't been able to keep up with the costs and demands of a fast-changing industry has also been a contributing factor, Oligino says.

"Practices that haven't been able to succeed are looking to partner with someone who can help them accelerate their growth," she says.

But both buyers and sellers have to be patient, Oligino warns.

"I think people believe [a successful M&A transaction] happens a lot faster than it actually does," she explains. "People think it will happen in the next 12 months, but it could take from three to five years."
Buyers of solo practices or small firms are usually not large themselves, often having less than around $500,000 in assets. As a result, these firms don't have access to the kind of cash available to acquirers such as large RIA firms or private equity firms.

That's why deal terms as so important, Oligino notes, especially requirements that solo advisors and principals of small firms stay on for a certain period of time after they are acquired.

"How long a seller stays on to make the transition as seamless as possible is a very important consideration," Oligino says. "It can make all the difference between a good deal and a bad one."

The survey confirmed that the RIA M&A boom shows no signs of slowing down.

Three-quarters of the 234 firms surveyed by FA Insight said they expect to be in a transaction over the next five years, and interest in M&A transactions increased proportional to a firm's size. Indeed, 100% of firms generating $4 million to $8 million in revenue annually said they expect to enter a transaction within the next five years.

Among advisors with $1.5 million to $4 million in revenue, 76% expect to be involved in a transaction over the next five years, up from 50% who said they completed a deal in the previous five years.

Oligino says she doesn't see headwinds ahead that may slow down the frenetic pace of M&A deals.
Even a market downturn may not be a deterrent, she speculates.

"Sellers may not be as attractive because they'll have less assets," Oligino says, "but buyers may see [a downturn] as a good time to buy because firms will be undervalued."

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