Breakaway Advisor Transactions Rise 14% In 2016

Last year, 64 teams and individuals broke away from registered investment advisors (RIAs), wirehouses and independent broker/dealers to join other RIAs, a new market survey has found. This was a 14 percent jump from 2015.

The surge in breakaway activity was due to the expiration of “forgivable loans” that wirehouses signed to keep advisors from leaving the large firms at the height of the financial crisis in 2008, according to the 2016 DeVoe & Co. RIA DealBook.

Breakaway advisors, typically in small groups of two or three but sometimes individual advisors as well, are an endorsement of the independent distribution channel. That was the word from David DeVoe, managing partner of DeVoe & Co.

“The RIA model is the white cowboy hat solution for investors,” DeVoe told InsuranceNewsNet. “The independent model is not only good for clients but an economically smart move for advisors themselves.”

New Department of Labor fiduciary rules will cause an increase in breakaway activity, although the trend may be more pronounced at broker/dealers, he said.

This year, however, breakaway RIA activity is likely to fall off now that the seven-year loan period has expired and the departure wave has peaked, DeVoe said.

Of the RIAs deciding to go out on their own, some would have made a move at the tail end of the loan period, he added. Most would have a plan in place to move as soon as the loan period expired and the rest would plan to move in the months following the expiration.

But even with a slowdown this year, activity among breakaway advisors is expected to remain a vibrant part of the market this year, DeVoe said.

“Established RIA” Deals Inch Ahead

In addition to the 64 transactions classified as breakaway deals, 78 other deals involving “established RIAs” took place in 2016, the RIA DealBook survey found.

There were 76 established RIA deals in 2015, deals that involved stand-alone RIA firms looking to sell or merge with another RIA.

All mergers and acquisitions activity from breakaway advisors and established RIAs in 2016 rose 7.5 percent to 142 transactions compared with the year-ago period. That's according to RIA DealBook’s research sponsored by Nuveen.

It is the third year in a row of record RIA merger and acquisition activity, the survey found.

The independent advisory model resonates with the investing public and that has created incentives for a broad range of buyers to target RIAs.

“Overall we’ll see an increase in the RIA mergers and acquisition activity over the next seven years,” he said.

Seller Segment Bifurcation

For established RIA sellers, 2016 was a year of bifurcation, survey data indicate.

RIA owners are being more “open and strategic” with their decisions to sell.  Meanwhile, mergers are a way for RIAs to achieve larger scale in the competitive marketplace, DeVoe said.

Of the 78 transactions involving established RIAs, 43 of them involved RIAs with $100 million to $500 million in managed assets. This is an increase, from 30 in that segment in 2015. These firms are finding themselves the target of RIA affiliates of huge RIA consolidators.

RIAs with assets of $1 billion and $5 billion accounted for 23 transactions, an increase from 17 deals in 2015, as buyers looked to these RIAs to scale up operations.

RIAs with between $500 million and $1 billion saw their number of transactions drop to eight in 2016 from 16 in 2015. This occurred as buyers preferred larger or smaller RIAs, the report found.

In the largest segment, RIAs with more than $5 billion under management, there were only four deals last year. This was a decrease from 13 in 2015, the survey found. Megadeals, which peaked in 2015, have reverted to their historical average, DeVoe wrote.

Aging RIA owners can’t afford to wait too long to sell unless they care to join a “surge of unanticipated sales in the future,” DeVoe wrote.

That surge threatens to come about when owners realize that their RIA advisories have become too expensive for successors and the next generation to afford.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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