We know it’s happening, and here are the numbers.
At a time when independent registered investment advisor (RIA) firms’ revenue and profitability are reaching new highs, the industry is seeing an uptick in merger and acquisition (M&A) activity, based on the number of deals as well as the average deal size. According to the latest data compiled by Schwab Advisor Services, total and average deal size rose during the first six months of 2015 indicating that the industry has both the financial means and the appetite to make strategic moves in order to achieve scale and gain competitive strength.
The first half of 2015 closed with 37 completed transactions, up from 29 over the same period in 2014, according to the data. Total transaction value increased 53 percent to $49.8 billion in assets under management (AUM), a jump from $32.6 billion in the first half of 2014. Meanwhile, average deal size reached $1.3 billion in AUM, marking the highest average deal value since 2009, when the average transaction size for the entire year was $1.7 billion in AUM.
“The success of the RIA industry, buoyed by the impact of a six-year bull market, has helped increase valuations and put RIA firms in a place of competitive strength where they are well-positioned to invest in growth,” said Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services. “As the investor landscape evolves, firm leaders are making strategic decisions about how to keep pace with the needs of their clients and thrive over the long term. Many firms report that they have doubled their valuations over the past five years, according to our 2015 Benchmarking Study. Some firms are leveraging that strength by choosing growth via merger or acquisition to achieve scale, enhance or fill gaps in capabilities, grow their client base, or to add talent and technology proficiencies.”
The types of buyers involved in deals during the first half of 2015 remained consistent with previous periods, with strategic acquiring firms (SAF) and RIAs accounting for the buyer in 79 percent of all deals. Forty-three percent of transactions were led by SAFs and 38 percent were closed by RIAs.
Results from Schwab’s 2015 Benchmarking Study indicate that independent RIA firms have experienced five consecutive years of strong performance. Nearly half (42%) of firms have doubled their revenues and half have increased their AUM by 75 percent since 2009. Investor demand was a significant contributor to growth last year, with top-performing firms seeing an increase in new clients by 10 percent or more and increasing their share of wallet with existing clients by 4 percent. As firms continue expanding their footprints and looking for growth, M&A will continue to be an important consideration.
“Although we’ve seen an uptick in activity this year, we don’t necessarily see an indication that firms are viewing M&A as a preferred means to achieve scale,” said Beatty. “Certainly for some firms it makes strategic sense and current conditions make this a good time to act. But many firms are continuing to follow a multi-faceted client growth strategy, by winning new clients and continuing to earn the trust of existing clients, thereby increasing share of wallet. M&A continues to be part of a broad set of growth strategies advisors have to consider alongside such industry best practices as creating operational efficiency and attracting and retaining top talent.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
