RIA Mergers, Acquisitions Accelerate; Not The Consolidation Wave Some Predict - Study

Tom Burroughes

4 September 2014

It is often predicted that there will be a wave of consolidation in the US registered investment advisor sector but this hasn’t yet come to pass, despite some pickup in deal volume in the second quarter, according to figures from Schwab Advisor Services, part of Charles Schwab.

The amount of merger and acquisition activity in the registered investment advisor sector accelerated in the second quarter of this year, with 29 deals completed, totalling $32 billion of assets, the firm said. Figures are as of June 30.

As your correspondent was told at a recent wealth management symposium in Switzerland, the global industry often hears predictions that there will be heavy consolidation to deal with issues such as rising regulatory burdens, and a consequent need for economies of scale. However, while there has been a flurry of M&A activity among wealth managers worldwide, it hasn’t been on the scale that is sometimes talked about. And it seems the US RIA sector reflects this situation.

The Schwab survey said some 16 deals were inked in the second quarter, totaling $19 billion in AuM, up from 13 deals in the first quarter, with $14 billion completed. The average deal size also rose during the first half of this year, reaching $1.13 billion, compared to $808 million in the first half of 2013.

“Based on the data in our research, it appears RIAs are indeed in a good position to monetize their firm’s value, but they are more often looking to preserve the owner-operator model and retain their independence through internal succession,” Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services, said.

Some 9 in 10 RIA firms want to develop internal successors, suggesting desire for business continuity rather than upheavals via M&A deals.

Strategic acquiring firms moved upward in activity terms from last year, accounting for 38 per cent of total deals that were closed, against 31 per cent of deals completed by RIAs. The report showed more acquisitions by offshore-based entities, representing seven per cent of the total deals logged in the first half of the year.

As reported by this publication on July 11, RIAs achieved record growth and enjoyed a level of profitability not seen since 2006, according to Charles Schwab's 2014 RIA Benchmarking Study. Based on AuM, RIA firms of all sizes saw “remarkable growth” since the market lows of 2009, Charles Schwab said, highlighting that 36 per cent of all firms have doubled their AuM and revenues since then. The median firm realized a 12.8 per cent compound annual growth rate in AuM and 13.6 per cent in revenues.

In that study, data indicated an increase from last year in the number of firms that have executed a strategic plan and those that have a formalized succession plan in place . Specifically, referrals emerged as a chief component of organic growth, with 80 per cent of firms citing acquiring new clients through referrals as a top strategy for growth.