The independent RIA industry is showing its strength in the growing number of mergers and acquisitions in the sector this year, according to Schwab Advisor Services.
The number and size of such deals involving firms with at least $50 million in assets under management have increased since the first half of last year, indicating independent RIAs have the financial means and appetite to make strategic moves to achieve scale and competitive advantage, according to Schwab data released Wednesday.
The first half of 2015 closed with 37 completed transactions, up from 29 over the same period in 2014, according to Schwab. Total transaction value increased 53 percent to $49.8 billion in assets under management, a jump from $32.6 billion in the first half of 2014.
“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 of sales and relationship management at 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,” Beatty added. “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 add talent and technology proficiencies.”
Whether the market tumble of last week will continue and have an impact on the mergers and acquisitions rate remains to be seen, Beatty said. The financial crisis of 2008 and 2009 caused mergers and acquisitions to drop to a low of only 36 in 2009, but pent up demand emerged in 2010 and the numbers have been growing for the last few years.
Average deal size reached $1.3 billion in AUM (the average AUM for the firms being acquired) this year, the highest it's been since 2009, when the average transaction size was $1.7 billion, Schwab said.
“This is not a case of one or two mega-transactions tipping the scale. We have seen good participation across all sizes of advisors,” Beatty said. “Consumers are finding the RIA model attractive. This indicates a maturing industry that is good for the investor.”
Results from Schwab’s 2015 Benchmarking Study in July indicate that independent RIA firms have experienced five consecutive years of strong performance, with 42 percent doubling their revenues since 2009.
“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 multifaceted client growth strategy by winning new clients and continuing to earn the trust of existing clients, thereby increasing share of wallet.”