New M&A data from Schwab seems to suggest that the RIA space is not consolidating as fast as some have predicted it would – though the final analysis depends on how you define consolidation.
“The premise is that there will be consolidation due to increased cost and regulation complexity. We aren’t seeing that,” said Nick Georgis, vice president of Schwab Advisor Services. “There’s no evidence in the numbers that this is happening,”
Indeed, the Schwab study counts 57 M&A transactions involving RIAs in 2011, representing a total of $44 billion in AUM. That’s a drop from 70 deals in 2010, for a total of $63 billion in AUM. The average deal size fell from $895 million in 2010 to $798 last year, according to Schwab (See: 10 M&A Deals That Shaped RIAs in 2011).
However, Mark Hurley, who provides passive capital to fee-only advisories through Dallas-based Fiduciary Network, disagrees with this interpretation.
“It’s already a very consolidated industry with 80% of assets in 5% of firms,” Hurley said. “The significant thing is what happens to that 5%.”
Hurley is among a number of players in the industry who believe RIAs should be assessed on revenues and profitability and not just on AUM.
“The firms that make the most noise about assets often don’t make very much money,” he said. Low profitability translates to low enterprise value, he said. In Hurley’s view, many RIAs with low enterprise value should be considered no more than books of businesses, instead of viable ongoing operations.
“The reality is you have about 1,200 firms and the rest is books of business and whether the books are consolidated or not is somewhat irrelevant,” Hurley said. “What we think will happen is that 5% of firms will continue to grow and then there will be these other guys.”
Overall, Georgis said he attributes the drop in M&A activity to market volatility and economic uncertainty. He also pointed out a measurable increase in the number of banks purchasing RIAs.
“What we are seeing now is that the balance sheets of banks are in better places and they are thinking about ways to invest,” Georgis said. “Banks tend to think it’s a good opportunity to bring in the expertise of a wealth management firm so that they can have an ultra high new worth offering. So it’s a natural fit for a bank.”
However, he cautioned, “The red flag is it’s not always a good cultural fit for an advisor.”
Fiercely independent by nature, RIAs who agree to be purchased by banks often end up balking at the level of control banks often seek to exert over their operations, he said.
“That’s one reason why banks tend to pay more than other acquirers,” according to Georgis, “because they expect much more control and they expect to change things a great deal.”
Of the 57 deals tracked by Schwab in 2011, 58% percent were for less than $500 million in AUM, 33% percent fell between $500 million and $2 billion and 9% percent exceeded $2 billion. The study only counted deals of $50 million and up.
Schwab began tracking M&A transactions in 2004. Along with competitors like TD Ameritrade and ING Financial Services, it offers services to support advisors through the many types of transitions they may encounter.
Schwab's Advisor Transition Services includes an online database offered to advisors that custody with Schwab. The service connects advisory firm buyers and sellers and enables advisors to maintain anonymity while soliciting interest and collecting information from other firms. Buyers can also search for investment professionals with books of business who would like to join an RIA firm.
“We spend a lot of time with advisors to prepare to sell,” Georgis said. “Many advisors think they want to do that but when they dive in deep they (ultimately decide they) don’t want to.”
Ann Marsh writes for Financial Planning.