Inorganic growth is becoming an increasingly fundamental business strategy for many registered investment advisory firms, to the point where many established advisor practices are now becoming experienced buyers engaging in multiple deals.
Twenty-three of the acquirers involved in the 25 deals executed in the third quarter had purchased one or more RIAs in the past, according to data collected by DeVoe & Company. Across all transactions executed since January, 87 percent of the acquirers doing deals have purchased one or more companies previously. Among the established RIAs who announced an M&A deal this year, about 90 percent had previously acquired at least one other firm.
“What we’re starting to see is more of the established firms are realizing that acquisitions can be a core plank within their overall growth strategy. They’re saying, “Let’s create that core competency, let’s plan on doing a transaction every year or two,” said David DeVoe, founder of DeVoe & Company.
As of September, DeVoe reported 86 deals this year, a 41 percent increase from the 61 transactions completed during the first three quarters of 2014. DeVoe & Company tracks all mergers, sales and acquisitions of RIAs with more than $100 million in assets.
While consolidators—firms like HighTower and United Capital—are still one of the major players in the M&A space, family offices, roll-up firms and, in particular, established RIAs are quickly gaining ground. During the first half of 2015, consolidators executed about 40 percent of the 61 deals tracked by DeVoe & Company, compared to the 33 percent completed by RIAs.
“For some time now, industry observers have been aware that consolidators have been a dominate acquiring force within the industry. But we’re starting to see, outside of consolidators, RIAs who are doing deals and this is not their first rodeo,” DeVoe said.
So why are RIAs entering the M&A game so forcefully now? DeVoe said it’s a combination of timing and increased experience, as well as firms really seeking to realize the benefits of scale as they move toward a professional business model. And it’s not just big firms that are jumping in to execute multiple deals.
“We’re also seeing even smaller players, run by younger advisors, who are reading the tea leaves and see that there is going to be this wave of retirements and owner exits from the industry,” DeVoe said. “They’re also planning to grow their firm by doing three, five or seven different transactions over the next two to three decades that they’re in this industry.”
Acquisitions also allow firms to scale back-office operations, and provide advisors with a better balance of clients. From a regulatory aspect, there’s definitely a benefit to getting over the $100 million mark in order to obtain oversight by the Securities and Exchange Commission, rather than state securities agencies.
Firms seem to agree. In 2015, about 128 RIAs reported managing $100 billion or more in assets. That’s up 2.3 percentage points from a year prior and up 6 percentage points from 2012, according to data collected by the Investment Advisor Association.