Pandemic a Mere 'Hiccup' for RIA Dealmakers: TD Ameritrade

Advisory firm merger-and-acquisition activity set a record in the first half with 80 transactions, 7% ahead of the 2019 record of 75 during the same period, according to a report from TD Ameritrade Institutional, released Thursday.

And COVID-19, which burst on the scene in March? A "hiccup" for RIA dealmakers, who announced more transactions than in any six-month period going back two decades, the report said.

Following 33 announced deals in January and February, activity slowed to 29 deals in the March-to-May period, then shot up to 18 in June as securities markets stabilized.

The reported noted that the 29 deals in the middle period equaled the total in the 2018 first quarter, a record-high quarter at the time.

"There's a growing recognition among buyers that independent advisory firms are an attractive and reliable investment opportunity," Peter Dorsey, managing director of institutional sales at TD Ameritrade Institutional, said in a statement.

"And others continue to pursue deals to increase the accretive value of their own firms. This is creating a wave of positive deal momentum that far surpasses any hesitancies or obstacles to transacting related to coronavirus."

Dorsey acknowledged that even as RIA M&A has reached a new level, a downturn is possible, particularly in light of the coronavirus pandemic.

"The record-setting deal-making pace we're seeing is truly remarkable, particularly given all the social and economic disruption around COVID-19," he said.

"That said, the virus remains a threat and could seriously impact the advisory industry — and the economy at large. Barring any serious long-term implications from coronavirus, however, we expect the pace of RIA M&A activity continue to accelerate."

First-Half Trends

M&A-targeted firms in the first half represented $125 billion in combined assets under management, a record sum for any previous six-month period, the report said. The first quarter of the year also set a record high with $74 billion in combined assets under management.

The 125 firms in RIA deals announced so far in 2020 have a median $438 million in assets under management. This compares with 158 deals with median assets of $386 million in the same 2019 period and 94 deals with median assets of $413 million in the first six months of 2018.

Thirty-five percent of this year's deals involved firms with $1 billion or more in assets, up from about one in four throughout last year.

According to the report, minority share selling exploded in 2020. This enables original owners to maintain control over the direction of the firm while applying the injection of capital to generate new growth opportunities, it said.

There were 13 reported minority share transactions as of June 30, compared with nine in all of 2019 and just four in 2018.

The report said RIAs making deals with other RIAs continued to be the main form of transaction relationship relative to previous years, accounting for 64% of all deals through the first half — a share almost identical to all of 2019.

The share of these deals initiated by RIA multi-dealmakers resumed its upward trend in the first half, reaching 38% after having dipped to 35% in 2019, which was down from 46% the year before. Meanwhile, investor multi-dealmakers did 14% of deals in the first half, up from 11% last year and 6% in 2018.

Multi-dealers of either type now account for 51% of all deals, according to the report.

It noted that RIA multi-dealers originate as traditional advisory firms, then adopt routine transactions as part of a deliberate growth strategy whereby they initiate at least three deals over five years.

Investor multi-dealers typically include private equity-backed outfits — often called aggregators or consolidators — which are formed primarily to make multiple accretive transactions.

In contrast, bank or trust-initiated deals are shrinking. In the first half, these accounted for a mere 5% of all transactions — four deals.

— Check out Advisor Deal Activity Could Drop 20% This Year: Echelon on ThinkAdvisor.