Industry Spotlight > RIAs

Schwab Reports Fewer, but Bigger, Advisor M&A Deals in 2012

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Click to enlargeSchwab Advisor Services’ (SAS) quarterly report tracking industry-wide RIA mergers and acquisitions showed that M&A activity was flat in the second quarter and first half of 2012, but the average size of the deals has increased, and what Schwab calls “national acquiring firms” are dominating the RIA acquisition marketplace. The company, as part of its Schwab Transition Services initiative, tracks RIA firms that primarily serve HNW clients and that have a minimum of $50 million in assets under management, as well as breakaway brokers from wirehouses “who received consideration” for joining an independent RIA firm.


On Thursday, Schwab said that for the quarter and first half ended June 30, there were eight and 25 completed deals, respectively. The total size of the acquisitions in the period were $12.3 billion as measured by AUM in the second quarter, and $36.2 billion for the first half of 2012. The average size of the deals as measured by AUM of the acquired or merged firm was $1.62 in the second quarter and $1.4 billion in the first half.

Schwab reported that those ‘national acquiring firms,’ commonly known as rollup firms or aggregators (though those firms dislike both names), accounted for three of the eight deals in the quarter, and about 50% of total deals since the fourth quarter of 2011.

Jon Beatty of Schwab Advisor Services.“RIA M&A deal flow has remained steady during the first half of 2012, recording just slightly fewer transactions than the same period last year,” said Jon Beatty (right), senior vice president, sales and relationship management for SAS, in a statement. “While the second quarter slowed a bit in terms of the number of completed transactions, we’ve seen a big jump in the average deal size so far this year, indicating the overall strength of the RIA segment.”

In an interview with AdvisorOne on July 17 prompted by the release of Schwab’s 2012 RIA benchmarking study, Schwab’s Beatty pointed out that the majority of advisors in the study said their top initiative in 2012 was firm growth. Also, the study found that the more than 1,000 RIA respondents reported record revenues and asset levels last year, thanks to the addition of new clients and rising client retention rates.

Dave DeVoe, managing partner of Devoe & Co., said in an interview Thursday that RIAs and the national acquiring firms have emerged as the “two dominant buyer categories over the last five-plus years.” Prior to that time, said DeVoe, who formerly ran Schwab’s M&A group before founding his own advisor M&A consulting firm, it was the national and regional banks “who were big firms in this space around 2002-2004,” but have since “stepped away” from acquiring RIA firms.

Click to enlargeThat move was prompted not only by the cultural differences that often crop up whan a bank acquires an RIA firm, but also because the banks “have had their own set of issues” relating to the financial crisis and being TARP recipients in many cases. “The question,” said Devoe, is when the banks “may return more aggressively” to M&A of advisor firms, noting that the latest Schwab figures show that “the regionals have ticked up,” while the national banks are still on the sidelines. 

DeVoe said that RIAs are acquiring their peers to achieve both growth and scale. However, he says that “historically, going back five to 10 years,” the primary M&A rationale for advisors was to achieve growth. Now, he said, “We’re slowly and steadily seeing a change in that mentality; advisors are becoming more sophisticated and more strategic—acquiring to expand their geographic footprints, their services” and for reasons related to succession planning. “It’s good to see” that development, he says, since “acquiring for strategic reasons is a powerful thing.”

DeVoe expressed concern, however, over the number of advisors who still don’t have a succession plan, pointing to the large number of advisors “likely to exit this business for retirement” over the next five to seven years. “The lack of succession planning is an exposure for the RIA space,” he said, projecting that ”over time we’ll see more transactions for succession reasons” of advisory firms.

“There’s so much value in creating a succession plan and a continuity plan,” DeVoe said, for both the advisor and his clients. “If the client isn’t asking, ‘What happens to me if something happens to you?,’ they’re thinking about it,” he said. Especially for sole proprietors or owners of firms that are “responsible for getting new clients, that creates exposure” as well.

On the other hand, DeVoe said, implementing a succession plan “demonstrates [to clients] that you have a plan in mind for mitigating the risk” to their assets in the event of the advisor’s death or disability. “Each year,” he said, “we see more and more distressed sales.” To clients but also to potential acquirers, having a succession plan “also demonstrates strong business planning; a methodical approach to doing business” which might aid in client retention and would also make a firm more valuable to those acquirers, regardless of their business models.