Expect 2012 to be an especially active year for consolidation among registered investment advisory firms and outside service providers. M&A activity makes sense strategically because it’s a way for RIAs to stay competitive and expand their offerings while keeping costs reasonable, several industry professionals and analysts say.

The 2012 merger and acquisition session got off to a huge start this week after LPL Investment Holdings announced it will buy Fortigent, a Maryland-based wealth management services platform provider. LPL’s planned acquisition brings about $50 billion in AUM to the table, which provides the firm with plenty of opportunities to grow its business serving advisors.

Service firms targeting RIAs are certainly eager to start making strategic deals. First Allied, the independent broker dealer that broke away from Advanced Equities and joined private equity firm Lovell Minnick last August, is eager to buy other firms that represent strategic fits for the firm in 2012, First Allied Chairman Joel Marks says.

“We are excited about 2012,” Marks says. “We have a strong private equity backing, and access to tremendous intellectual and capital resources. We were on the outside looking in previously, but I think you’ll see us be more diligent about that this year.”

Service providers are always looking for ways to serve RIAs, including managing client assets, even if it means buying other firms to gain the expertise, according to Alois Pirker, research director at Aite Group.

“The space Fortigent is occupying is an interesting area,” Pirker says. “Similar firms could be of interest for IBDs that want to round up business.”

That is because RIAs demand more sophisticated vendor relationships than reps employed at independent broker-dealers, according to Chip Roame, managing partner at Tiburon Strategic Advisors.

“They are more likely to do their own portfolio accounting, their own portfolio management [and] to deploy alternative investments,” Roame says. “RIAs demand more sophisticated research and more sophisticated performance reporting, whether from vendors for them to do in-house or through outsourcing providers.”

Those can be costly operations, making consolidation one option for firms to expand their offerings, expand their businesses and stay competitive.

However, LPL’s recent acquisition — on it own — is not likely to spur all of its competitors to react, according to industry sources. The Boston-based firm is already so large that its nearest competitors are wirehouses and super-regional brokerage firms, Marks says.

As for smaller independent broker-dealers who perhaps cannot pull off an M&A deal, Pirker says they are better off honing niche strengths that support specific areas.  

“Fee platforms and RIA servicing platforms are in demand,” Pirker says. “Getting better at managing fee assets is something every firm should take a look at, because it is a growing business.”

Asset custody firms expect robust M&A activity among RIA firms themselves. Schwab Advisor Services expects a spurt of deals in the next 12 to 18 months, a result of larger firms looking to put strategic capital to work, and succession planning for mature advisors, according to Nick Georgis, vice president of Schwab Advisor Services.

High expectations for 2012 follow last year’s slowdown compared with 2010. According to Schwab Advisor Services, firms completed 44 M&A deals involving RIA firms by Sept. 30, 2011, representing $37.7 billion in AUM, according to the most recent statistics available. For all of 2010, there were 70 deals totaling $62.6 billion in AUM.

The money to fund new deals is likely to come from several sources inside and outside the industry. Consolidators will examine RIA firms throughout the country to make selective purchases as a way to expand their networks. Regional banks will target RIA firms as a way to add wealth management services to their offerings, Georgis says.

“So many advisors are near retirement age,” he says. “The numbers dictate that there will be more deals.”

Donna Mitchell writes for Financial Planning.
















Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access