Recent snapshots of the advisory industry’s mergers and acquisition activity, along with new data on the growth and decline in advisory channels, show that as wirehouse advisors are slowly shrinking, the business model of choice has become being dually registered advisors; while M&A activity in the advisory industry fell slightly in the second quarter, the deals were larger.
Cerulli Associates released data in late August which shows that the number of producing advisors stood at 338,481 in 2004, but that number dropped to 320,378 in 2010, a growth rate of -0.9% for the industry as a whole during those six years. By 2015, the Boston-based research firm estimates that there will be 312,250 U.S.-based advisors.
Wirehouses will continue to lose advisors, with Cerulli projecting that the number of brokers populating this channel will drop from 50,742 in 2010 to 43,905 by 2015. The four remaining wirehouses—UBS, Bank of America Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo—“are focusing on moving up market, continuing to shed lower producing advisors,” says Tyler Cloherty, a Cerulli analyst. That being said, however, the wirehouses are still “the clear industry leader in terms of assets” held by advisors. While Cerulli is projecting declines in market share for the wirehouse firms, Cloherty says they will nevertheless remain the “primary players in the market for the foreseeable future.”
But he says that the wirehouses are having difficulty training and growing internally the advisors of the future. As wirehouse teams continue to go independent, Cloherty says the wirehouses face some serious challenges in defining their future strategy for growth.
The dually registered business model, on the other hand, has seen growth “significantly above the market average” Cloherty says, with a 10.2% growth rate in the past year and a 17.9% growth rate annually since 2004. Advisors view this model as the best of both worlds, Cloherty reports, because it allows the independence of the fee-based RIA model, while retaining the ability to sell commission-based products such as non-traded REITs and annuities. He cites firms such as HighTower, U.S. Capital Management and Dynasty Financial Partners as significant recent entrants into the dually registered environment that offer “an alternative to productive wirehouse teams.”
The regional and insurance channels were hardest hit, the Cerulli analyst says, in terms of advisor losses. The number of advisors at regional broker-dealers went from 38,249 in 2009 to 34,359 in 2010, while the number of insurance BD reps fell from 95,404 in 2009 to 89,121 in 2010.
Claherty notes that while there have been “concerns” about the overall reduction in advisors, the majority of advisors “who washed out of the industry were among the least productive members of their respective firms.” These part-time brokers or low producers, he says, “were unable to keep their heads above water following another year without significant market improvement.” With the “low-end washout,” he says, the good news is that “the regional and insurance channel’s average advisor’s productivity, measured in average assets under management compared to the industry average, improved.”
Meanwhile, on M&A …
While M&A activity in the advisor industry fell slightly in the second quarter, the deals were larger and total assets exchanged increased to $8.5 billion from $6 billion in the first quarter, according to Pershing Advisor Solutions’ “Real Deals Quarterly Update,” produced in partnership with FA Insight.
Only seven transactions targeting retail-focused RIA firms with at least $50 million in AUM or $500,000 in annual revenues occurred in the second quarter of 2011, the Real Deals report found, which is down from the 11 deals in the first quarter. The seven deals in Q2 are also fewer than the number of deals that took place in each of the previous four quarters.
“Deal activity is still clearly not at the pace it was a few years prior, but it continues to progress,” says Dan Inveen, principal and director of research at FA Insight. “We continue to see some of the same themes as the last year or two—much less activity by serial buyers or consolidators.” But Inveen has seen a definite uptick in banks acquiring RIA firms.
The firms acquired in the second quarter of 2011 had a median of $800 million in AUM, twice the median amount of assets exchanged in the previous quarter, the report found. Nearly half the purchases included RIAs with more than $1 billion in assets, while the total assets exchanged were around $8.5 billion, up from just over $6 billion in the first quarter.
The most surprising trend in Q2 was the notable increase of bank and trust acquirers, the report notes. Since the financial crisis that began in late 2008, bank and trust firms have been largely absent as RIA acquirers, the report notes.
Bank or trust company acquirers accounted for just 13% of all deals completed in 2010 and made only one acquisition in the first quarter of the year. However, they were involved in five of the seven deals during the second quarter. While “industry pundits had written off banks as active acquirers, we are seeing there are a fair number of banks that have capitalized sufficiently to entertain transactions,” Inveen says.
Schwab’s Report on RIA M&A
Recently released data from Charles Schwab Advisor Services of industry wide mergers and acquisition activity among registered investment advisors for the first half of 2011 also reveals a significant jump in the average deal size.
According to the Schwab data, there were 27 M&A transactions involving RIAs in the first half of this year, representing approximately $20.8 billion in total AUM.
The AUM for the average deal during the first half of 2011 was $770 million. In contrast, the first half of 2010 yielded 30 transactions representing $12.4 billion in AUM, with an average AUM per deal of $412 million.
“Thus far in 2011, we’ve seen a significant leap in the average deal size due to a greater proportion of those with $1 billion or more in AUM, despite a slight decrease in transactions over the same period last year,“ said David DeVoe, managing director of strategic business development for Schwab Advisor Services, in announcing the M&A results.
According to Schwab, the 12 M&A deals in the second quarter of 2011 represented $13.2 billion in AUM and represented a decrease from the 14 deals with approximately $8 billion in AUM reported in the same quarter in 2010. The 12 deals tracked by Schwab in Q2 of this year had an average deal size of $1.1 billion, versus $571 million in Q2 of 2010. The dominant buyer category continues to be other RIAs, Schwab says, which conducted 12 transactions in 2011.
“RIAs continue to be the dominant buyer category, demonstrating their growing sophistication in mergers and acquisitions,” said DeVoe. “It also shows RIAs’ willingness to use M&A as one way to achieve business goals and objectives.”
In Q2 2011, Schwab issued M&A data based on an updated methodology that provides a tighter focus on RIAs who directly serve the high-net-worth client segment and removes institutional RIAs.
From now on, Schwab’s M&A data will focus on:
• Firms that predominantly serve high-net-worth retail investors;
• Firms with at least $50 million in AUM; and
• Breakaway brokers from wirehouses who received consideration for joining an RIA.