M&A of RIAs hits record level

Mergers and acquisitions among registered investment advisory firms once again is on the rise, with a growing number of smaller advisers looking either to buy or sell practices, according to The Charles Schwab Corp. In the first quarter, 24 RIA transactions involving $19 billion in assets were completed, said David DeVoe, managing director of the strategic-business-development group at Schwab Advisor Services, the custody unit of the discount broker. Those two dozen deals are a record for any first quarter since Schwab began tracking mergers and acquisitions of retail advisory firms a decade ago. In the first quarter of 2009, there were 19 deals, up from 15 in 2008. The pickup in M&A activity could mark the end of a slowdown that began in 2009, when the RIA market saw 71 transactions. "We were down in 2009 after four consecutive record years," Mr. DeVoe said. The bear market in 2008 and 2009 drove down values and distracted advisers, he said. Mr. DeVoe expects a return to the upward trend in transactions and predicts steady growth over the next five to seven years. Advisers are “going through a natural period of consolidation,” he said, driven by an aging adviser population, interest from private-equity and consolidator firms, and increased sophistication among advisers about M&A options. In the first quarter this year, more than half of the transactions involved advisers with $250 million or less in assets. Historically, these smaller advisers accounted for just a third of deals. Mr. DeVoe said it's too soon to tell if smaller advisers will play a bigger role over time. But owners of smaller firms have become more knowledgeable about their options in merging or buying other practices for strategic purposes, he said. So far this year, private-equity firms and consolidators were involved in 35% of the transactions involving firms with $100 million or more in assets, and RIA firms were buyers in 42% of the deals. Those two categories of buyers “have been the dominant players coming up on five years now,” Mr. DeVoe said, and they are expected to continue to play that role. As late as 2004, banks were buyers in about 30% of advisory-firm sales, but many of those combinations didn't work, Mr. DeVoe said. Banks have not been active in the market for the past several years, he added.