Schwab 2013 RIA M&A data show hope but also futility

The RIA M&A market remains stubbornly mired in the mud — but it doesn’t totally stink.

The quarter ended March 31 closed with 13 completed merger-and-acquisition deals totaling $5.8 billion in assets under management within the independent registered investment advisor segment, according to data compiled by Schwab Advisor Services.

This tally represents a drop from the first quarter of last year, when 17 deals were closed, totaling $24 billion in AUM.

But the face value of the results is somewhat misleading, according to David DeVoe, chief executive of DeVoe & Co.

“If you back out the HighTower deals from Q1 2012 numbers, then the number of transactions between the Q1 periods of 2012 and 2013 are nearly identical.” See: The RIA M&A market stumbled in 2012, but giants were not deterred, Schwab end-of-year data shows.

Looking to buy

Acquisition activity by RIAs — as opposed to roll-ups, banks or other buyers — increased this quarter, with 54% of the total transactions closed by this buyer category.

Roll-ups completed 38% of the total 13 transactions. See: Roll-up-like deals back on the rise in first quarter as RIAs look for succession plans.

“Though it’s still very early in the year, this quarter’s strong deal flow among RIAs is an indication that advisors are using M&A to increase the scale and footprint of their businesses,” Jon Beatty, senior vice president of sales and relationship management at Schwab Advisor Services, said in a release.

Early findings from Schwab’s 2013 RIA Benchmarking Study, the largest of its kind focusing exclusively on RIAs, show that approximately 27% of RIAs surveyed are actively seeking to buy another RIA firm.

Growth conundrum

Mark Hurley, CEO of Fiduciary Network LLC, says that this finding by Schwab seems way low.

(Mark Hurley: Ninety percent-plus of the
big firms that we have talked
to — as well as many
small ones too — are interested
in making acquisitions.

“Ninety percent-plus of the big firms that we have talked to — as well as many small ones too — are interested in making acquisitions. Consistent with what we pointed out in the paper regarding the “growth conundrum” larger firms face, the hallenge is finding acquisitions which are both attractive and material. The latter trait is by far the hardest to find.” See: Why a pair of Zero Alpha RIAs are combining and out-and-out avoiding roll-ups and private-equity money.

Hurley adds: “I still have not seen a flood of sellers come to market. While there were more sellers in the last 12 months than there were only a couple of years ago, I have not yet seen a wave of them come to market.”

Local flavor

Beatty believes prospects for the improvement in the M&A market is still at the mercy of other markets.

“Given RIAs’ enthusiasm for mergers and acquisitions, coupled with the strong flows recorded to date, we believe there will be an increase in appetite for deals among RIAs moving forward if the economy improves and capital and liquidity become more accessible,” Beatty said in the release.

The continued lethargy in the market is very concerning, according to DeVoe.

“With the average owner north of 55 years old and only 25% of advisors having a succession plan in place, these low numbers continue to be alarming,” he says. “For this segment of the advisor base, firms with over $100 million, we should be seeing over 100 external sales a year — nearly two times what we are seeing in actual transactions.” See: A roll-up exec talks about owning a roll-up and calls out his fellow entrepreneurs to focus on genuine distinctions.

But Hurley says that sellers are still faced with adverse nuances when it comes to selling because the national market retains a very local flavor.

“Most buyers are looking in fairly narrow geographic markets — i.e., ones that are proximate to them,” he says. “So while there may be many bidders in the aggregate, [there are a] fairly limited number in each geographic market. Add to that [the fact that] even fewer have necessary capital — or the access to it — to pay for the acquisitions which are currently fully priced, and there is likely only one or two potential buyers which are both culturally and economically attractive to potential sellers in each transaction. Steve Levitt of Park Sutton [Advisors LLC] likes to call it neither a buyer’s nor a seller’s market, but rather one which reflects underlying value.”

Equity transfer

Indeed, it may be an internal-transfer market.

“Anecdotally, DeVoe & Co. is seeing heavy interest in succession planning and internal equity transfer,” DeVoe says.

“Of the company’s 47 engagements in the last 16 months, 72% have included migration of equity to employees and 62% have been directly related to the succession of a principal.”