Investment advisor deals, once a fragmented backwater of financial services, are surging as Wall Street eyes fees in a business with pricing power.
Mergers and acquisitions involving wealth advisors and brokers reached a seven-year annual high in November, according to data compiled by Bloomberg. That was even before Charles Schwab Corp.’s blockbuster $26 billion agreement to purchase TD Ameritrade Holding Corp.
Wall Street is flush with cash and companies from Goldman Sachs Group Inc. to private equity firms are investing in wealth managers for their stable revenue streams. Founders of advisory firms are seeking successors after years of expansion powered by the historic bull market.
Independent advisors have plenty of reasons to sell now. For starters, offers may vanish when a bear market comes, as revenues are tied directly to assets under advisement, which would drop if stock portfolios shrink.
“Pricing has never been better than it is today for sellers,” said Peter Nesvold, an investment banker with Raymond James Financial Inc. “They take into consideration it’s the 11th year of an expansion. If not now, when?”
This year’s announced M&A deals for U.S. wealth advisors and brokers surpassed $5.9 billion in November prior to the Schwab news, up from 2018’s total $5.5 billion, according to data compiled by Bloomberg. The 79 tie-ups year-to-date as of Wednesday compare with a post-crisis high of 92 during all of 2018.
While there’s a risk of paying peak prices, one reason for the steep valuations is that independent advisors are a rare finance sector that has resisted fee compression as technology squeezes transaction costs elsewhere. Trading and asset management are increasingly commoditized, with brokers offering free trades and index fund fees falling to pennies per $100.
Clients typically pay registered investment advisors, or RIAs, about 1% of assets a year for personalized service such as portfolio construction, estate planning and tax strategies. That compares with Schwab’s revenue on client assets of 29 cents per $100 in its latest quarter. Fintech firms such as Wealthfront and Betterment offer so-called robo advice for next to nothing.
RIAs with $2.4 trillion assets will be potential acquisition targets in the next decade, according to a November report by Cerulli Associates. The key growth driver is aggregators, who account for 3% of firms and 8% of assets. The 10 major RIA consolidators increased assets at a combined 22% compound annual growth rate over the past five years, versus 10% for the business overall.
“Consolidators are amassing assets at a much faster rate than the broader RIA market, which itself has been outpacing other channels,” said Marina Shtyrkov, an analyst at Boston-based Cerulli. “They’re attempting to aggregate this highly fragmented market and create economies of scale and they’re really emerging as large leaders in a market where the majority of firms are still small businesses.”