A combination of forces is driving M&A and breakaways in the North American wealth management industry, new data shows. Deal sizes are also becoming larger.

Merger and acquisitions in the US Registered Investment Adviser space are projected to rise significantly this year, with average deal sizes also rising, figures from investment bank ECHELON Partners show.

According to ECHELON’s report, RIA breakaways continue from wire-houses, as the latters’ recruiting bonuses are squeezed amid an industry shift to fee-based advice. (The shift is being driven by forces such as this year’s inception of the Department of Labor's Fiduciary Rule.) Through the third quarter of 2017, 302 breakaways had taken place with an additional 88 expected in the final quarter of this year.

Despite slightly lower volume in 3Q 2017, expected deal volume for the full year is on trend to reach 169 transactions, 23 per cent above 2016’s record year. The average size of breakaways is rising, up 7.1 per cent over 2016 levels to $300 million, with 15 $1 billion-plus breakaways through Q3 2017, the report said. 

Average deal sizes surpassed $1 billion for the second year in a row, the report said. ECHELON noted that for the first three quarters of 2017, average transactions came in at $1.1 billion, the highest of the past seven years.

Changing regulations and client demands have led to a wave of breakaways but owners of these new businesses find that going independent isn’t straightforward, as they need to outsource functions or pool resources to contain costs. These considerations trigger M&A, joint ventures and business alliances. 

Earlier this week, for example, Telemus Financial Life Management, with offices in Illinois, Michigan and California, bolstered its Midwest presence by buying Barrington Strategic Wealth Group. At the end of last week Tiedemann Wealth Management, a New York-based wealth advisor with about $12 billion in assets under advisement, agreed to buy Seattle-headquartered Threshold Group, a wealth-advisory firm and family office with $3.4 billion in assets under management.

The trend also puts a spotlight on firms providing support services, such as back- and middle-office functions, to enable new RIA executives to concentrate on advice and finding new clients. For example, this news service has in the past spoken, for example, to the likes of Vantage Private Wealth, which used the services of TruClarity, a business providing advisor clients with a transition service spanning technology, compliance, research and marketing. Familiar names such as Fidelity and Charles Schwab (as in Schwab Advisor Services), to give just two, work with RIAs in providing much of the backup they need so they have confidence to go it alone.

Big deals
The acquisition of Focus Financial’s $100 billion of assets under management by private equity big-hitter KKR and Stonepoint Capital is one of the industry’s largest “mega-deals” made by private equity investors, an accelerating trend, ECHELON’s report said.

“The aging advisor population combined with consolidation at the top end of the industry is leading to increasing volumes of deals, both in total numbers as well as in assets,” Dan Seivert, chief executive of ECHELON Partners, said. “Our research in the Deal Report is projecting a continued increase in M&A activity across the board and our total platform approach is resonating in the industry as ECHELON has recently completed our 70th $1 billion-plus transaction,” he said.

The report also noted that recruiting bonuses of 200 to 400 per cent of gross revenue with a duration of seven to 10 years had become the standard tool for wire-house recruiters. Viewed as not viable any longer because of the Fiduciary Rule, these bonuses have drawn fire; their use is decreasing and as a result breakaway volume remains high, ECHELON said. 

Consolidators are dominating RIA dealflow, accounting for 53 per cent of RIA purchases thus far in 2017, 33 per cent greater than in 2016.

Among recent M&A deals in wealth management are those of Associated Banc-Corp, which earlier in October agreed to acquire Whitnell & Co, a wealth management and multi-family office services firm based in Oak Brook, Illinois. The transaction is due to complete in November. California-headquartered Mercer Advisors, meanwhile, acquired a financial planning and investments firm, Ray Mignone Associates, with $290 million of assets under management. In September, Canadian Imperial Bank of Commerce completed its acquisition of a Chicago-based private wealth management firm, Geneva Advisors. Focus Financial Partners, the US-headquartered partnership of wealth managers, in September added another firm to its orbit: Eton Advisors, a registered investment advisory firm based in Chapel Hill, North Carolina.