Rollups Account for Majority of Advisor M&A in Q3: Schwab Report

Schwab’s quarterly report finds deals’ AUM through 3Q nearly matches 2011’s full-year total

On Monday, Schwab Advisor Services released its quarterly report on RIA mergers and acquisitions, and three datapoints tell the story. Rollup firms accounted for 70% of the transactions recorded in the quarter, and year-to date-transactions with a quarter to go nearly match the value of all transactions recorded in 2011. But the actual number of deals in 2012 is still lower.

Click to enlargeIn the quarter, Schwab’s report on RIA M&A found that there were 10 deals completed for RIA firms—rollup firms, which Schwab calls “national acquiring firms,” accounted for seven of those transactions—with a total value of $6.1 billion.

Year to date through the quarter ended Sept. 30, there were 35 transactions accounting for $42.38 billion in assets under management; in all of 2011, there were 57 deals that accounted for $43.88 billion in AUM.

Dave DeVoe (right), founder and managing partner of the advisor M&A consulting firm DeVoe & Co., said in an email message that the Q3 M&A numbers were “softer than anticipated” and what would be expected for an industry “with over 10,000 firms.”

He suggested that the slowdown in transactions “is likely caused by sellers or buyers being distracted,” and that one of those distractions might well be the extended volatility of the markets.

In addition, DeVoe, who formerly ran that part of Schwab Advisor Services which tracks advisor M&A, said “business management issues such as growth of new clients or partners grappling with conflicting goals” can also distract. Summing up, he characterized advisor interest in mergers and acquisitions as “high,” but said advisors are “often distracted from the path to completing the transaction.”

A lack of distraction might very well be why the rollup firms are accounting for a greater share of transactions, DeVoe speculated.  “Consolidators maintain momentum in this environment because they have a focused acquisition plan and process.” That process often includes weekly meetings with an advisor seller to work through specific issues around the proposed transaction, which “helps drives deals to conclusion.”

Anecdotally, DeVoe wrote that advisor M&A interest is very high, as evidenced by his own firm, which he said has hired two new investment bankers over the past five months “to keep up with demand.”

Click to enlargeWhile the value of all RIA deals has approached 2011’s total, the pace of deals has fallen this year from the high of 17 in the first quarter. However, the average deal size has risen this year, to $1.21 billion compared with 2011’s full-year average deal size of $798 million.

Two years ago was an even busier year for deals; 2010 saw 70 total deals worth $62.68 billion.

So far in 2012, those rollup firms have completed 19 transactions, accounting for 54% of all completed transactions. In the third quarter of 2011, 17 M&A transactions were completed, according to Schwab.

In a statement, Jon Beatty, senior vice president, sales and relationship management at SAS, said that ”uncertainty in the markets and the upcoming presidential election” accounts for the decline in the number of transactions. He argues that the “national acquiring firms remain dominant players” while RIA firms considering conducting a merger or acquisition “have been sitting on the sidelines waiting for the right opportunity."

The numbers support the contention that RIA firms are themselves staying on the sidelines this year. In 2011, RIA firms accounted for the largest percentage of transactions—44%—but only 20% so far this year. In 2011, the rollup firms accounted for 30% of all transactions, compared with 54% this year.

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