The asset management industry kept a healthy M&A pace in the third quarter, as some firms shopped to build up technological capabilities and scale.

The biggest deal was Invesco's $1.2 billion acquisition of Guggenheim Investments' ETF business, which represented $37 billion in assets under management. The year's biggest acquisition remains Scottish insurer Standard Life's $4.7 billion deal to acquire Aberdeen Asset Management, creating the U.K.'s largest active manager at $1.14 trillion.

The asset management and wealth management M&A space posted 35 deals worth $2.4 billion in total activity. Deal value jumped 20%, while deal volume rose 25% from the second quarter, according to PwC.

Standard Life’s $4.7 billion deal to acquire Aberdeen Asset Management is still the largest of the year.
Standard Life’s $4.7 billion deal to acquire Aberdeen Asset Management is still the largest of the year. Bloomberg News

Technology demands and fee compression are contributing factors toward a firm's decision to sell or buy, said Jonathan de St. Paer, Schwab's head of strategy and product. He and Schwab Investment Management CEO Marie Chandoha spoke on M&A activity during a panel discussion at the annual Schwab Impact conference in Chicago.

Passive's popularity is another factor in M&A. Traditional managers have sought acquisitions of shops that specialize in passive. For instance, BlackRock's iShares rose to 27% of its total asset base in the third quarter, from 23% the previous year. But its active funds now contribute 18% of total AUM, from over 21% last year.

An edited transcript of the conversation follows.

How is fee compression affecting M&A in asset management? Is there potential M&A activity for Schwab in asset management?
De St. Paer: We definitely see fee compression, which started before the DoL rule, but we see that continuing and expect it to continue and even ramp up in a post-DoL world, regardless of timing.

It is something that is affecting different asset managers very differently.

Those of us who have consciously built businesses that are more index-oriented, very low-cost, transparent, share-class structures, I think we're pleased to see the benefit of that serving clients, and therefore seeing growth in assets.

I think managers that have more of a legacy business model of higher costs inherent in that model, maybe some challenged performance, that's where you are really seeing them struggling with the business growth, and you are certainly seeing some acquisition, some transactions happening on that side of the space.

And where we play in that core area, more of the indexing, we're really focused on scale of our existing product set and scale of those core products, rather than acquiring a wide array of different capabilities or different strategies that might not fit, starting with what does the client need and how big is that.

That causes us to look at the industry and any acquisition opportunities a little bit differently, and a little bit more strategically and less opportunistically, than some others might.

Schwab Investment Management head of strategy and product Jonathan de St. Paer and CEO Maria Chandoha discuss M&A trends at the annual Schwab Impact conference.
Schwab Investment Management head of strategy and product Jonathan de St. Paer and CEO Maria Chandoha discuss M&A trends at the annual Schwab Impact conference. Suleman Din

Chandoha: I look at the M&A activity seeing two themes. One is, as John pointed out, the firms that have more-challenged business models, and that tends to be the more-traditional active managers who aren't growing but need greater scale.

So you see some of those merging and coming together. But you also see some mergers because there is a growing opportunity, globally, of acquiring capabilities overseas, or overseas managers acquiring capabilities here.

I see those being two key themes where there is a lot of M&A activity, and I think it's only going to increase.

Is there a danger of too much passive in the markets, particularly as many active managers now launch their own passive ETFs? Where does this pendulum toward passive become a problem?
Chandoha: I do think that the growth of passive is going to continue for a couple of reasons. One is that passive investing, particularly ETFs, are really great ingredients in terms of creating portfolios.

Having that low-cost floor is a great way to construct a portfolio, and that is definitely amplifying the growth of indexing and ETFs.

I do think that the bar has gotten a lot higher for active managers.

You have to have good performance, and you have to have competitive fees to gather assets.
I was looking at some recent Morningstar data, and the flows into active funds are going into four- and five-star funds, and those active funds that have the lowest fees.

So I think you can win in the active space, but the bar is a lot higher than it was before.

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