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The new normal for RIA M&A? Billion-dollar deals.

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The billion-dollar M&A deal appears to be the new normal for RIAs.

The average deal size for an RIA transaction topped $1 billion in AUM for the third year in a row, through June 30, according to Schwab Advisor Services. And Jon Beatty, senior vice president of sales and relationship management for Schwab, expects that benchmark to remain the industry standard.

"We see green lights ahead as long as there's a stable economy and stock market," Beatty says. "Large firms are finding reasons to merge with firms who are even larger. We're seeing the scaling up of the industry and there's no sign that it's about to stop."

The average deal size for 2015 and 2016 was around $1.4 billion; through June 30, 2017 AUM for deals averaged $1.1 billion, according to Schwab's first half report on industry transactions.

RIA firms were the most active buyers through June 2017, accounting for 43% of transactions, up from 35% for the same period last year, according to Schwab.

Aggregators such as Focus Financial Partners and HighTower Advisors, described as "strategic acquiring firms" by Schwab, also remained prominent buyers, increasing their share of purchases to 35% through June, up from 31% for the first six months of 2016.
RIAs have an advantage as buyers because independent advisory firms who are selling are attracted to like-minded companies, according to Beatty.

"RIAs who are buyers have walked in the sellers' shoes," Beatty says. "They do the same thing. They're also fiduciaries. Sellers feel comfortable turning over their clients to another RIA. And they see it as a succession plan, where they can make sure their employees will have equity in the new firm."

What's more, major RIA buyers such as Mariner Wealth Advisors, Beacon Pointe Advisors, Savant Capital Management, Aspiriant and Bronfman Rothschild have all done multiple transactions over a number of years. "RIA buyers have a proven track record at this point," Beatty says. "They've demonstrated that they have the capability to secure deals and integrate firms."

But successfully wooing a like-minded RIA is hardly a slam dunk.

"They often face capital constraints, offer lower pricing and tend to have more seller financing, using promissory notes for risk mitigation," says investment banker Liz Nesvold, managing partner of Silver Lane Advisors, a New York investment banker specializing in the RIA M&A market. "They don't have the revenue distribution that a bank does, for example, or the stability. And while equity is a great form of consideration, the only buyer for that stock is the acquiring firm itself."

RIA buyers may also face higher hurdles in the current seller's market, says Matthew Matrisian, senior vice president of strategic initiatives for AssetMark, an industry service provider.

"A potential headwind for buyers is the fact that sellers are getting much smarter about what they want to accomplish," Matrisian says. "They have leverage now and more ability to dictate terms when picking a buyer."

"We see green lights ahead as long as there's a stable economy and stock market," says Schwab SVP Jon Beatty. "Large firms are finding reasons to merge with firms who are even larger."

And Beatty notes that, in addition to banks and private equity firms seeking to buy advisory firms, competition among RIA buyers has picked up this year, with new entrants such as Chicago-based independent DiMeo Schneider entering the market.

He also points out that a market downturn could put the brakes on frenzied buying. "Asset levels will go down," Beatty says, "so the payoff won't be as good, and advisors will be spending more time with their clients, leaving less time for transactions."

Deal volume for RIA transactions remained steady, according to Schwab, with 52 deals completed through June, the same number for the same period last year.

But data on advisory M&A transactions is a notoriously imprecise science.

DeVoe& Co., one of the industry's leading M&A consultants, recorded 82 deals for the first half of the year, with an average AUM size of only $698 million, about $400,000 less than the average transaction size Schwab reported.

RIA deal making is "a complex eco-system," Beatty says, without "a central resource" for data. Different firms, he says, may use different criteria to compile statistics.

"Our methodology is to only include deals over $50 million," Beatty says. "If you include smaller deals, you'll have different data."

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