RIAs lead the way in M&A as roll-ups step back: Schwab

Number of deals up, assets in play down from 2012

Mar 4, 2014 @ 8:37 am

By Trevor Hunnicutt

Registered investment advisory firms were the biggest acquirers of other similar practices last year, displacing an increasingly selective set of roll-up firms, according to data released Tuesday.

RIAs were responsible for a plurality (44%) of the 54 mergers and acquisitions that took place among independent firms last year, up from 22% a year earlier, according to the Charles Schwab Corp., which tracks deal data.

In all, the deals amounted to new ownership for practices that managed $43.65 billion in assets for clients. That was lower than 2012, when firms acquired $58.80 billion in nine fewer transactions, according to Schwab, the largest RIA asset custodian and platform provider.

“The RIAs acquiring essentially a majority of the firms over the last 12 months is an indicator of the growing sophistication of RIA principals in mergers and acquisitions,” said M&A consultant David DeVoe. “The independents are getting smarter and thinking about how they can strategically use mergers to achieve growth objectives.”

At the same time, serial investors — sometimes called consolidators, aggregators or roll-ups — stepped back, initiating less than a third of the transactions last year, according to the data. That was down from more than a half of transactions in 2012 that were initiated by firms like Focus Financial Partners and United Capital Financial Advisers.

“In speaking with them offline I've found that the big-name roll-up firms are being very selective about the type of partners that they're willing to bring on board, and that speaks to the maturity of their executive teams and the ability to be disciplined and selective,” said M&A consultant David Selig.

Banks, meanwhile, completely dropped out of the picture. A decade ago they represented more than half of the market, said Mr. DeVoe. Last year they were responsible for no transactions at all, Schwab said.

Some banks have struggled to integrate advisory practices, finding the business units' employees, product mixes, technology standards and compensation packages to be at loggerheads, according to analysts.

That has created opportunity for fast growing and newly confident regional and national RIA brands. Many top-tier RIAs are flush with profits as stock market appreciation for the better part of the last five years has lifted fee-based revenue. They've been working to supplement client growth, plan for business succession, acquire talent and expand geographical reach by buying other firms, according to more than a half-dozen consultants and firm principals interviewed by InvestmentNews.

“In any industry, whether you're an RIA or any other industry, you're either growing or you're shrinking, and growing firms have a lot of excitement around them,” said Neal Simon, chief executive of Highline Wealth Management. “The partners pop out of bed every morning a little more excited to go to work.”

The Rockville, Md.-based RIA, which manages more than $1.2 billion, is buying practices and hiring advisers to deepen its presence in the Mid-Atlantic U.S.

But the data seem to show that RIAs on average are buying smaller firms than consolidators, which Schwab calls “strategic acquiring firms.”

Average deal size fell last year to $808 million of assets under management, after hovering above $1.3 billion from 2007 to 2009, when analysts say the financial crisis began to affect deal flow. AUM size bounced back in 2012, which one M&A consultant, Todd Fulks of FP Transitions, described as “a banner year.”

By contrast, 2013 got off to a “tepid” start, according to Mr. DeVoe, with just 18 deals in the first two quarters. That pace doubled in the second half of the year. There are more than 40,000 advisers employed at thousands of RIA firms in the U.S.

Dealmakers say RIA mergers can be serendipitous and that a years-long courtship can precede the marriage of the firms. That makes the future pace of RIA-to-RIA deals hard to predict, but some consultants said demographics are a major driving force – 48% of RIA firms' advisers are 55 or older, according to Cerulli Associates Inc., a research firm.

Even as consolidators have stepped back, many of the firms they own have not.

“We're thinking of 2013 really as the year of the tuck-in acquisition and all of the affiliates of the strategic acquirers are driving that trend,” said Jon Beatty of Schwab Advisor Services, referring to the small deals that add advisers' practices to existing firms. “So the parent company strategic acquirer might have been a little quieter in 2013 versus 2012, but their affiliates were active,” he said.

There are early indications that trend may continue this year. On Tuesday Focus Financial Partners said its affiliates have added $1 billion in new client assets from eight transactions in the first 63 days of this year.

Telemus Capital, a $2.2 billion Michigan-based Focus partner, acquired a Beverly Hills, Calif.-based practice, Concentric Capital, to gain footing on the West Coast and “to expand its offering to entertainment and sports industry clients,” according to a statement by Focus. And in its seventh transaction in three years, St. Louis-based Buckingham Asset Management acquired Irvine, Calif.-based Wealth Management Group, a firm said to manage some $100 million for clients.

“At the end of the day we want to have a lot of conversations but be horribly picky about who we partner with,” said Brent R. Brodeski, chief executive of Savant Capital Management, a Chicago-area advisory firm that manages $3.7 billion. “Whenever M&A – in our industry or any other – fails, it's when you don't have cultural alignment.”

One of the nation's fastest growing fee-only advisory firms, Savant bought nearby Paragon Advisors in a deal that closed at the end of December and solidified the fee-only firm as one of the largest in the Midwest. Mr. Brodeski was introduced to the Paragon's founding principal, Gregory De Jong, by a wholesaler for American Funds Distributors Inc., an asset management firm.

Mr. Brodeski said one of the advantages of purchasing businesses is that it's a much easier way to bring in clients than building business from scratch. Given the competitive market for top advisers, it can also be easier to buy the business of a top adviser than hiring them, he said.

“We don't need to do any deals to be successful,” said Mr. Brodeski. “We just have said it's a part of our growth strategy.”


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