RIA M&A Surges in 2010: Why, and Will It Continue?

RIA merger and acquisition deals continue to be executed at the record pace that was set in the first quarter of this year, according to data compiled by Schwab. During the first three quarters of 2010, a total of 70 deals have been executed versus the high of 59 deals set during the same period in 2008. The YTD deals are also just one transaction shy of the 71 deals closed during the entire year of 2009. 

(See a feature article from Investment Advisor on trends in advisor M&A from Mr. Devoe.)

So, why are we experiencing record M&A numbers, especially at a time when valuations are still below the historic average? Moreover, why is this happening at a time when so many buyers are on the sidelines (most banks are not engaged in RIA acquisitions and a few consolidators have suspended their M&A activity)? 

This heavy flow is likely the result of a broader M&A trend surging through the industry, which is being further buoyed by a short-term surge of pent-up supply. 

The industry is potentially halfway through a ten-year cycle of increasing M&A. This trend is the result of several factors including aging principals approaching retirement, investment from private equity firms, and the proliferation of consolidators. The fourth major driver, the growing M&A sophistication of RIA principals, is underscored by 2010 being the fourth successive year in which RIAs themselves have been the dominant acquirer category.

In many cases, the 2010 deals that would have occurred naturally are being supplemented by a number of 2009 transactions that were essentially delayed.  Many principals stepped away from the negotiation table to tend to clients during 2008/2009 market decline (and rightly so),