Deals on the Rise as RIAs Use M&A Activity to Spur Growth

Deals on the Rise as RIAs Use M&A Activity to Spur Growth

M&A activity up 20% as firms complete 54 deals last year

RIAs are looking to grow and are seizing on the opportunity to scoop up smaller firms, according to new report by Schwab Advisor Services. RIAs were the biggest buyers of other RIAs last year, with 44 percent of the 54 overall merger and acquisition deals for 2013 completed by RIAs. Smaller firms in particular utilized the deals as a growth strategy during the second half of the year, Schwab found.

“There was an identifiable trend last year during the second half of 2013 in which larger firms acquired smaller and mid-size firms, an indication that firms across the spectrum looked to M&A as a means to quickly expand their footprint,” says Jonathan Beatty, senior vice president of sales and relationship management for Schwab Advisor Services.

Across the board, deal activity increased 20 percent year-over-year, with the number of acquisition deals increased from 45 to 54 deals in 2013. The second half of 2013 in particular saw a spike in deal activity, with 36 deals closed totaling $28.2 billion in assets under management, compared to the 18 deals completed during the first and second quarters of 2013.

“This is the type of momentum we should be seeing,” says David DeVoe, founder of the financial services consulting firm DeVoe & Co. The 54 deals completed in 2013 was not an unusually high number, but rather the number of deals in 2012 and early 2013 represented a slowdown.

But while the number of deals increased, the total client assets acquired decreased by 26 percent. Last year, AUM acquired totaled $43.7 million, compared to from the high of $58.8 million reported in 2012.  The overall lower number of assets in these deals is indicative of RIAs picking up small firms, according to Schwab.

According to Schwab’s 2013 Benchmarking study, 25 percent of firms with $100-$250 million in client assets said they were actively looking to acquire another firm. “Mid-sized and some smaller firms are becoming much more savvy with mergers and acquisitions and willing to use M&As to make a strategic move,” DeVoe says.

It's not just smaller firms getting in on the action, however. Beatty is seeing some of these larger RIA firms in the $1 billion range looking to do tuck-ins and less peer-to-peer acquisitions. "2013 was really the year of the tuck-ins," he says, noting the volume of assets down is a result of this trend. 

Although RIAs were the leading purchaser of firms, strategic acquiring firms (which include firms such Focus Financial and United Capital) still represented a major buyer class, completing 32 percent of the deals in 2013. In 2012, these buyers were the biggest buyers, completing 53 percent of the deals. Banks continued their downward acquisition trend, with both regional and national banks completing no deals in 2013. 

But Devoe says that the banks are positioned for a comeback, having put the upheaval of the market downturn behind them. “These days, the banks have recovered and have capital to deploy,” he says. “Banks will re-enter this space.”

“It was a strong year for M&A activity and probably the first we’ll see of many,” DeVoe says. Given the number of firms in the industry and the demographics of advisors, DeVoe says the number of deals should be several times the number reported, especially when taking into account the number of advisors set to retire in the next few years. “I expect mergers and acquisitions to increase, even dramatically, over the next 7-8 years.”

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