From the November 2008 issue of Wealth Manager Web • Subscribe!

November 1, 2008

M&A: Alive and Well

While the rest of the economy--and virtually all of the financial services industry--contracts, the RIA business may well set another new record for mergers and acquisitions. According to new data from Schwab Institutional, the leading custodian for RIA firms, a total of 49 M&A deals have been completed since the beginning of the year (as of Sept. 5), indicating 2008 will surpass the 80 deals completed in 2007.

"In 2008 in particular, there's been an uptick in the number of acquisitions and the amount of assets has increased," says David G. DeVoe, director of mergers and acquisitions for Schwab Institutional's strategic client group. "It's an indicator of strong, growing sophistication of independent advisors."

(While the financial pages tend to join the two types of transactions at the hip, there is actually a significant gap between the numbers of mergers versus acquisitions in financial services. "We only saw about five true mergers in '07," says DeVoe, a fact that he believes underscores the sophistication of the principals.)

According to DeVoe, there are a number of factors that make some 10,000 or more advisory firms ripe for consolidation. "Mergers and acquisitions are not only a way to open up your business and client base," he says, "but also to add new expertise."

And given the demographic profile of current practitioners--the average RIA principal is 55 years old and 30% are over 50--M&A is "a strategic way to assure succession."

On the other side of the equation is the recent proliferation of possible partners--particularly, DeVoe points out, of private equity, often in the form of holding companies.

With a 25% growth rate, it's little wonder that the RIA sector is attractive to private equity. And thanks to the increase in recent years of holding companies offering a variety of benefits, independent firms can literally find something for everyone.

"Each company has a different model, so for the independent firms, a majority of which are solo proprietorships, there is a far greater ability to remain independent," says DeVoe. "You can find someone who's a really good partner for your firm, and in a lot of cases, these are not 100% deals, but minority or majority stakes--maybe 30%, 40%, 60%, 70% of the firm, And usually," he adds, "they are pretty much hands-off. When the acquisition is done, they want the current ownership to retain interests in the business."

The trend among holding companies toward specialization is especially attractive to wealth management firms. Among current active acquirers, for example, one concentrates on the CPA-IA model, another on marketing to ultra-high-net-worth clients, still another on facilitating succession.

Because the wealth manager model has grown more aggressively than other types of advisory firms, wealth managers probably need to start their succession plans earlier, DeVoe says. He urges all principals to consider their succession plans "whether they're 65 or 35. It's always important to think of the proverbial 'hit by a bus,'" he cautions. And while the exponential growth of assets under management "shows the independent model is resonating with the public," it also means that some firms have become unaffordable to their own next generation.

"A firm with $300 million in AUM could be worth $5 or $6 million or more, so you can imagine how difficult it becomes if you want to sell to your junior partners," he explains. The infusion of funds available from a holding company, some of which will even help juniors finance a stake in the firm, opens up a 10- to 15-year window of opportunity.

In any case, as DeVoe sees it, when a firm is acquired by a holding company, the principals are only practicing the diversification they preach to their clients: "By selling a piece of the firm," he says, "they can diversify their investments."

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