There’s a “consistent story” seen in the data gathered by Schwab Advisor Services about the health of the advisor community, says Jonathan Beatty.
“RIAs are having a tremendous amount of success” in both client acquisition and assets under management, Beatty said Tuesday in discussing the findings of Schwab’s latest advisor M&A data and its 2015 benchmarking study. “They’re having success in building scale, and margins are robust,” said Beatty, senior vice president for sales and relationship management at Schwab Advisor Services.
That success is borne out, he said, in the latest data on M&A in the RIA space.
In the first half of 2015, the data that Schwab gathers on RIA mergers and acquisitions showed 37 closed deals, compared with 29 finalized transactions over the same period in 2014. The total value of those 37 deals increased 53% to $49.8 billion as measured by AUM, compared with $32.6 billion in AUM in the first half of 2014. Average deal size reached $1.3 billion in AUM in the first half of 2015, topping the high point for average deal value which was reached in 2009, Schwab reported, when the average transaction size for the entire year was $1.7 billion in AUM.
Schwab collects its M&A data by collecting "industry reported transactions” monitored by a team inside the firm's business consulting organization, and it has used the same methodology since it began tracking transactions, including counting only those deals where RIA firms had $50 million or more in AUM. In addition, Schwab says its data reflects deals "involving primarily high-net-worth and endowment-focused RIAs" and "advisors-in-transition who joined an existing RIA and received equity consideration."
Beatty noted the “breadth of participation” among the 37 deals in 2015 so far. “Eleven deals involved firms with more than $1 billion” in AUM, he said, so that’s “something to watch,” though a number of other deals involved midsize firms as well.
As for who was doing the acquiring and merging, Beatty said the types of buyers involved in the closed deals “remained consistent with previous periods,” with strategic acquiring firms (SAFs) accounting for 43% of deals and other RIAs accounting for 38%.
Beatty pointed out that the “vast majority” of RIA firms don’t view a merger or acquisition as their preferred succession or exit strategy, and instead “are working on internal succession plans; they always have seen” a merger or acquisition “as a second option.”
Advisors always want to know how valuable their firms are in the marketplace. So does this “significant uptick” in advisor M&A mean that firm valuations are growing? “There are many inputs into valuations, so you have to be careful” in connecting deal values with overall firm valuations, Beatty cautioned. “We don’t track multiples,” but the “size of a firm is part of valuation” and “growth drives valuation,” he said.
In addition, Beatty said “we also know that a more institutionalized business model attracts a higher multiple; it’s more attractive to the buyer.” That’s the case even in an internal succession plan, where Beatty says that “typically the seller,” usually the founding partner or partners, “can get a higher multiple internally if employees believe the firm is an ongoing entity” whose growth can continue past the internal succession plan.