RIA industry still waiting for perfect storm to drive M&A activity

Observers of the RIA industry have long predicted a perfect storm for consolidation as strong markets boost valuations, more buyers move into the space, older advisers look to retire and regulation puts pressure on mid-size firms.
But signs of the expected spike in mergers and acquisitions have yet to emerge, according to a survey from The Charles Schwab Corp.’s registered investment adviser custody unit, Schwab Advisor Services.
Total assets in transition have declined steadily since 2007, when approximately $90.7 billion in assets changed hands, according to the survey, which Schwab has done since 2006. Last year, around half that amount, or $43 billion assets, transitioned.
In the first half of 2014, $32.6 billion has changed hands, Schwab said, from 29 deals. That’s ahead of the pace of the first half of last year when 18 deals closed, but on track for the average of 51 deals per year since 2006. The peak was in 2010 when 70 deals closed.
The average size of the deal increased to $1.13 billion in assets, up from $808 million in the first half of 2013.
“We’re seeing a healthy pace or steady pace of transactions over eight years with a few dips along the way,” said Jonathan Beatty, senior vice president of sales and relationship management at Schwab Advisor Services. “That is a positive for the profession, but it isn’t necessarily the trend of consolidation which we’ve heard some analysts in the industry predict.”
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The study took into account responses from 1,132 RIAs that custody with Schwab and reflects firms being sold with AUM exceeding $50 million as of the beginning of the year.
“We are not seeing the spike in industry consolidation that many analysts and observers have been predicting,” said Mr. Beatty. “It appears RIAs are indeed in a good position to monetize their firm’s value, but they are more often looking to preserve the owner-operator model and retain their independence through internal succession.”
Elizabeth Anderson, founder of Beekman Wealth Advisory in New York, said she has turned down a number of roll-up firms or intermediaries for investment bankers working on behalf of acquirers.
Founded in 2003, Beekman manages around $370 million and acts as an “outsourced CIO” for a small number of wealthy families, mostly with more than $10 million, Ms. Anderson said. As a full owner of the firm, she was concerned that selling any part of the business would dilute the business model. There are only three employees at the firm, all of whom are women.
“Generally when someone acquires you or finances you, they want to have a pretty big say in how you operate,” she said. “My sense is that anyone who bought us would try to change our culture or turn us into a product selling shop.”
Still, the calls are likely to continue rolling in at firms like Ms. Anderson’s as activity by industry consolidators continues to climb and new buyers, including international players and banks, become some of the largest dealmakers.
Those consolidators accounted for around 38% of the deals versus 31% of deals completed by RIAs, Schwab said. Offshore-based entities, a growing presence in the U.S. investment adviser space, accounted for 7% of the deals in the first half of the year. Banks accounted for another 7%.
Ms. Anderson said she expects to get to $1 billion in assets under management but planned to reach that point through referrals and making some individual hires rather than through acquiring other firms.
“Our clients are few in number but large in dollars, so when we get a referral it provides a meaningful bump in assets,” she said. “I plan to work as long as my clients want me there, but ultimately I’d like to do an internal succession because we have a unique business model and culture.”
Mr. Beatty said that the anticipated consolidation could still be on the horizon. He said that it could come as more advisers retire or need a capital infusion, or if the markets dropped suddenly.
“Many large RIAs are gearing up their capabilities to acquire either books of business or entire firms,” he said. “When that catalyst comes, we know that there’s a waiting group of buyers who have that capability.”