Registered investment advisory firms were furiously busy getting hitched last year: they did the highest number of merger and acquisition deals recorded in at least seven years. According to a report released by Schwab Advisor Services Wednesday, RIA firms did a total of 109 deals in 2010 representing $156 billion in assets, up from 70 deals representing $103 billion in assets in 2009. Last year's dealmaking even surpassed the prior record of 88 deals set in 2008. Schwab started monitoring m&a transactions in 2003.
The boost in M&A activity was constant throughout 2010. During the first half of last year RIAs did a total of 40 transactions representing $30 billion in assets under management, the strongest first half on record, according to Schwab. Third quarter figures were also strong.
“We saw a significant uptick in M&A deal activity among RIAs in 2010, largely due to advisors putting these discussions back on the front burner after spending the bulk of 2009 helping clients navigate the volatile market environment and managing the day-to-day business of their firms,” said David DeVoe, Schwab Advisor Services managing director of strategic business development, in a statement. “Specific drivers of deal activity include advisors’ growing interest and sophistication in M&A and succession planning, continued interest of holding companies and private equity firms in RIAs, as well as advisor principal demographics.”
The average deal size in 2010 was about $1.4 billion, down slightly from $1.5 billion in 2009.
Alois Pirker, research director at Aite Group, believes the growth in M&A activity is an indicator of the maturity of the RIA market. Early on in the RIA industry, you were seeing three-person shops, whereas over the last couple of years, you’re seeing larger units building out, he said. This has been facilitated through the growth of aggregators such as HighTower Advisors and Focus Financial.
“In general, when we look at the RIA market, we have more and more firms that are above $1 billion in assets,” he said. Some firms are taking their bets on going regional or even national, he said. “The verdict is not quite out yet.” Pirker said one of the big advantages of the RIA firm is the community aspect. “It’s inherently local.” When you scale that, you lose that local aspect.
The aging population of advisors and the growing number of those coming up on retirement is likely another factor driving M&A growth, Pirker said. These advisors are selling their practices.
Pirker expects RIA M&A activity to continue its upward trend in 2011, driven by the aging population as well as the consolidation trend. “This is not a one-year exercise,” he said. M&A activity will continue as the markets get better, books of business pick up and valuations increase, he added.
According to the Schwab report, more than half of the deals involved RIA firms buying other RIAs. Transactions were dominated by smaller firms, with 58 percent of deals representing less than $500 million in assets, while 23 percent were between $500 million and $2 billion, and 19 percent greater than $2 billion.
“M&A happens on all levels,” Pirker said. In addition, the majority of RIAs are smaller firms.