RIAs’ M&A Activity Fell in 2011, but They Remain ‘Dominant Buyer’

RIAs account for $44 billion in AUM

While the number of M&A deals and the average deal size are down, RIAs are the “dominant buyer,” according to a report released by Schwab Advisor Services on Wednesday.

Nick Georgis“Market volatility and economic uncertainty led to a decline in M&A activity in the second half of the year,” Nick Georgis (left), vice president of Schwab Advisor Services, said in a statement. “RIAs remain the dominant buyer category, but we observed a measurable increase in the number of transactions completed by banks.”

“Banks appear to be coming back to life regarding acquisition,” Georgis told AdvisorOne. “We remind advisors to do their due diligence, especially around culture and always have their eyes open.”

In 2011, there were 57 M&A deals involving RIAs, accounting for nearly $44 billion. The average deal size, according to Schwab, was $798 million, its lowest level since 2005.

The number of deals in 2010 was initially reported as 109 representing about $156 billion in AUM. Schwab changed the methodology used to track M&A activity in the second quarter of 2011 to focus on firms with at least $50 million in AUM that predominantly serve high-net-worth retail investors, and breakaway brokers from wirehouses who received consideration for joining an RIA. That change in methodology resulted in an apparent drop in the number of deals and assets under management. Under the new methodology, RIA deals totaled 70 in 2010, and represented $63 billion in AUM.

Of the 57 deals Schwab tracked in 2011, the majority were for less than $500 million, but one-third represented between $500 million and $2 billion.

“We’re seeing more activity over the last three to four years and we think that’s a trend that’s here to stay,” Georgis told AdvisorOne. The reason, he said, is more advisors “are well-established and see acquiring an RIA as part of their growth strategy.”

Georgis noted, however, is that with the sheer number of RIAs there will always be a certain level of M&A activity among RIAs.

Another factor that might drive consolidation is increasing regulations and scrutiny on advisors, most especially, according to Georgis, the idea that state registration will be required of advisors with under $100 million with other advisors registering with the Securities and Exchange Commission.

“The thought is that the increased cost to comply will lead to more consolidation, but that’s still conjecture at this point,” Georgis noted. “Obviously, that remains to be seen.”

Some advisors are outsourcing their compliance needs rather than consolidating, Georgis said. “They know they need a culture of compliance, so they’re asking for help,” he said.

The economic environment has not overlooked M&A activity. “As headlines move away from uncertainty, we should start to see more activity,” Georges stated.

Georgis reminds advisors who are thinking of selling their practice as part of their succession plan, “Succession planning is a long process. It requires five years of making sure the right things are in place and five years to transition. We encourage advisors to start early.”

Advisor M&A activity was one of the featured subjects in a Jan. 18 web seminar hosted by AdvisorOne that featured David DeVoe, formerly of Schwab and now managing partner at DeVoe & Co.. See the archived presentation here.

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