Pershing, Schwab Surveys Find RIA Mergers Flat or Down Slightly in 2010

Slower Pace of Transactions Continues, but a Rebound Is Inevitable – Both the number of deals and the time required to complete deals slowed considerably relative to the last peak in 2007. Only 41 deals involving firms with more than $100 million in assets under management (AUM) were completed in 2010, however, an up-tick by year-end suggests an imminent turnaround.

Firms Sold Shrank in Size – Firms acquired in 2010 tended to be much smaller relative to those acquired in previous years. Registered investment advisors (RIA) with less than $100 million in AUM accounted for 18% of all firms sold or merged. This is double the percentage of firms that size that were acquired each year from 2004 to 2009. The median AUM of all acquired firms in 2010 was only $400 million, the lowest median asset level observed in the last 10 years and about 15% lower than the median AUM of deals completed in 2009.

Composition of Buyers Continues to Evolve – The shift in the composition of buyers of RIA firms observed in Real Deals 2009 continued into 2010. RIA-to-RIA deals now account for about half of transaction activity. Banks, which were prominent buyers at the turn of the millennium, have faded in prominence. Serial buyers, which have captured a great deal of industry attention in recent years, have recently lost momentum.

Valuations Vary Widely – The limited number of publicly-available transaction details makes generalizing about deals challenging. However, the study suggests that valuations for premium targets are either off 10% to 15% from the perceived 2007 peak or are holding steady. Less desirable and smaller firm deals, however, are experiencing more significant value compression according to those interviewed.

Understanding Value Drivers is Critical to Creating and Realizing Value – A solid understanding of value improves an owner’s ability to create, build and ultimately realize value regardless of whether a transaction is imminent. As detailed in the study, these drivers include a combination of leading and lagging indicators of performance and a series of qualitative and quantitative firm characteristics ranging from profitability, operational efficiency and productivity to firm management and culture, client demographics, value proposition and the structure of the client service relationship.