Louisville, KY — Merger and acquisition (M&A) activity in the Registered Investment Advisor (RIA) industry hit a new record for the fifth consecutive year in 2018, with transactions increasing 20 percent over the prior year’s high water mark.ⁱ But for the first time in five years, RIAs and fee-based advisors are less bullish about the pace of transactions over the next 12 months, as they are less likely to expect consolidation and M&A activity to increase, according to the latest results from the fifth annual Advisor Authority study of roughly 1,600 RIAs, fee-based advisors and individual investors commissioned by Nationwide Advisory Solutions, formerly known as Jefferson National, and conducted online by The Harris Poll.

This year, the percentage of RIAs and fee-based advisors who expect RIA industry M&A to increase has declined nine percentage points—to 59 percent in 2019 from 68 percent in 2018—following a peak of 70 percent in 2017, 68 percent in 2016 and 65 percent in 2015. This is the lowest percentage of RIAs and fee-based advisors to predict increased activity since the study was commissioned five years ago, suggesting there may be concern that issues with the market and the economy may erode valuations and decrease opportunities for transactions. In fact, among RIAs and fee-based advisors, 56 percent anticipate that market volatility will increase over the next 12 months and 56 percent are concerned about a U.S. Bear Market over the next 12 months, followed closely by 54 percent who are concerned about a U.S. economic recession over the next 12 months.

“Since launching our Advisor Authority study in 2015, a growing number of RIAs and fee-based advisors were saying that M&A activity would increase—so this year’s sharp reversal in the trend could be an indicator of greater uncertainty about the market and the economy,” said Craig Hawley, Head of Nationwide Advisory Solutions. “But at the same time that RIAs and fee-based advisors are less bullish about the pace of consolidation and M&A activity, the majority still say that these deals will have a positive impact on their business. Consolidation among firms is driven by a variety of factors—including increasing competition, rising fee compr][ession, the need for greater scale, as well as succession planning for a generation of older advisors.”

Serving Clients and Achieving Scale

The RIAs and fee-based advisors who say that M&A will positively impact their business is up slightly in recent years (51% in 2019, 51% in 2018, 49% in 2017, 47% in 2016). Consistently, sentiment surrounding M&A activity in the RIA industry shows that advisors remain focused on delivering excellent service in their clients’ best interest and achieving greater scale. Year over year, among RIAs and fee-based advisors who feel positively about the effect of M&A activity impacting their business in the next 12 months, the top two reasons include greater resources to serve their clients (31% in 2019, 38% in 2018, 42% in 2017, 36% in 2016) and greater resources to expand and scale their businesses (31% in 2019, 35% in 2018, 32% in 2017, 34% in 2016).

Foreshadowing the “Silver Exit”

As ten thousand Baby Boomers a day turn 65 and prepare to retire, an early indicator of the RIA industry’s looming “Silver Exit” may be foreshadowed in the positive sentiment around M&A. Year over year, RIAs and fee-based advisors who indicate positive sentiment about the effect of M&A activity are slightly more likely to say it allows them to create a succession plan (28% in 2019, 26% in 2018, 25% in 2017, 24% in 2016) and it increases opportunities to sell their business (27% in 2019, 25% in 2018, 20% in 2017, 21% in 2016). Meanwhile, they are slightly less likely to say it increases opportunities to buy another practice (26% in 2019, 25% in 2018, 29% in 2017, 32% in 2016).

A Path to Success

Year over year, Advisor Authority has also shown that the most successful advisors—defined as those who earn more than $500,000 or individually manage total AUM of $250 million or more—eagerly adapt to industry trends like M&A to benefit the growth of their firm. They are more optimistic than all advisors about the pace of M&A and its impact on their practice to tap into greater potential. As this year’s study shows, the successful advisors who expect RIA industry M&A to increase has declined only four percentage points—to 71 percent in 2019 from 75 percent in 2018—following 76 percent in 2017, 73 percent in 2016 and a peak of 77 percent in 2015.

Successful RIAs and fee-based advisors are more likely than all RIAs and fee-based advisors to say that M&A will positively impact their business (64% in 2019, 57% in 2018, 61% in 2017, 62% in 2016). Successful advisors who indicate positive sentiment about the effect of M&A activity also say top reasons include greater resources to serve their clients (36% in 2019, 32% in 2018, 35% in 2017, 35% in 2016) and greater resources to expand and scale their businesses (35% in 2019, 30% in 2018, 39% in 2017, 29% in 2016). Of note, in 2019 successful advisors are somewhat more likely than all RIAs and fee-based advisors to say M&A activity has a positive impact because it increases opportunities to buy another practice (31% vs. 26%) and somewhat less likely to say it increases opportunities to sell their business (25% vs. 27%).

Challenges and Concerns

A relatively small percentage of RIAs and fee-based advisors feel negatively about the impact of consolidation and M&A activity on their business in the next 12 months (12% in 2019, 12% in 2018, 12% in 2017, 15% in 2016). This year, the number-one reason cited by those who feel negatively was a preference to manage their business independently without oversight, which directionally increased compared to prior years (33% in 2019, 20% in 2018, 19% in 2017, 22% in 2016). In prior years, the number-one reason cited by those who feel negatively was the challenges of competing as a small independent firm (32% in 2019, 48% in 2018, 43% in 2017, 39% in 2016). Year over year, increased pressure to “sell” products that might not be right for clients is also cited among the top three factors for negative sentiment about the impact of M&A (32% in 2019, 39% in 2018, 37% in 2017, 36% in 2016).

“There is an industry-wide shift toward a fee-based model as more investors demand personalized, holistic financial advice that is in their best interest,” added Hawley. “Our findings show that overall, RIAs and fee-based advisors believe consolidation and M&A creates more opportunity for independent shops and is not synonymous with increasing pressure to compromise their fiduciary standard.”

For additional insights on RIA Industry M&A, financial professionals can also download the latest infographic from the fifth annual Advisor Authority study at:

https://know.nationwideadvisory.com/AdvisorAuthority2019/MAInfographic

The fifth annual Advisor Authority study explores the investing and advising issues confronting RIAs, fee-based advisors and investors—and the innovative techniques that they need to succeed in today’s complex market. It features a special focus on the most successful advisors and the most affluent investors. These latest findings are to be followed by a series of ongoing reports that will be released through the first quarter of 2020.

About Advisor Authority: Methodology

The fifth annual Advisory Authority Survey was conducted online within the United States by The Harris Poll on behalf of Nationwide Advisory Solutions from February 15 – March 4, 2019 among 1,021 financial advisors and 824 investors, ages 18+. Among the 1,021 financial advisors, there were 507 Registered Investment Advisors and 514 Broker/Dealers. Among the 824 investors, there were 205 Mass Affluent (Household Investable Assets of $100,000 to less than $500,000), 205 Emerging High Net Worth ($500,000 to less than $1 Million), 207 High Net Worth ($1 Million to less than $5 Million) and 207 Ultra High Net Worth ($5 Million or more). Advisors are weighted where necessary by employment status and active management to bring them in line with previous years’ profile. Investors are weighted where necessary by age by gender, race/ethnicity, region, education, income, marital status, household size, investable assets and propensity to be online to bring them in line with their actual proportions in the population.

About The Harris Poll

The Harris Poll is one of the longest running surveys in the U.S. tracking public opinion, motivations and social sentiment since 1963 that is now part of Harris Insights & Analytics, a global consulting and market research firm that delivers social intelligence for transformational times. We work with clients in three primary areas; building twenty-first-century corporate reputation, crafting brand strategy and performance tracking, and earning organic media through public relations research. Our mission is to provide insights and advisory to help leaders make the best decisions possible. To learn more, please visit www.theharrispoll.com.

About Nationwide Advisory Solutions

Nationwide Advisory Solutions, formerly known as Jefferson National, is a recognized innovator with a mission to help RIAs and fee-based advisors build their practice by helping their clients to potentially accumulate more wealth and reach their financial goals. Nationwide Advisory Solutions does this by developing and delivering value-added investment products, services and technologies that dovetail with fiduciary obligations—wrapped in an industry-leading customer experience. To learn more, please visit www.nationwideadvisory.com