Big, traditional M&A deals are on the decline as the number of active serial buyers in the marketplace falls.

That’s the conclusion to be drawn from two seemingly contradictory reports released last week, one by Schwab Advisor Services that showed M&A on a record pace and the other compiled by FA Insight of Seattle and sponsored by Pershing Advisor Solutions that showed M&A deals at a five-year low.

The FA Insight study, called Real Deals, found that 41 mergers and acquisitions of registered investment advisors happened in 2010, down from 47 deals in 2009.

Graph from Pershing’s Real Deals study

Symptomatic of marketplace confusion

Schwab Advisor Services, meanwhile, said there were 109 deals representing approximately $156 billion in total assets under management for all of 2010, compared to 70 deals and approximately $103 billion in assets under management in 2009 — a jump of 51% in terms of assets under management. It also said there were 23 M&A transactions involving RIAs in the first quarter of 2011, down from the 25 deals reported in the first quarter of 2010. See: Schwab redefines RIAs in its M&A study but experts say further refinement is needed.

The contradictions between the two studies seem symptomatic of the confusion in the marketplace as serial buyers, variously known as aggregators, consolidators and roll-ups, fall back. RIAs themselves are doing more acquisitions but those deals don’t take the same structure as a pure M&A deal.

Indeed, both Schwab and FA Insight say that the apparently radical differences in their deal totals can be explained by their definition of a deal. Schwab counts lift-outs and other deals that involve consideration being paid to effect a transaction for assets that may not meet the purist definition of M&A. For example, Schwab counts deals done by HighTower Advisors, the successful Chicago-based aggregator that pays high-powered brokers to leave wirehouses. FA Insight does not count those deals.

See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now .

Both studies agree that the deals are smaller.

“Smaller advisory firms are taking center stage as serial buyers pull back and RIAs step up,” said Dan Inveen, managing principal of FA Insight and author of the latter study. Eighteen percent of the deals were under $100 million — an unusually high number of micro-deals, he added. FA Insight doesn’t count deal of less than $50 million of AUM. Inveen says that in fact the totals in his study will climb as more data filters in from 2010.

Of the 109 deals tracked by Schwab in 2010, 58% of deals were for less than $500 million in assets under management, 23% of deals were between $500 million and $2 billion, and 19% of deals were greater than $2 billion. The average dropped from $1.5 billion to $1.4 billion of assets under management per deal.

Contradictions

The bottom-line trend, according to both studies, is that serial buyers are on the decline. Meanwhile, the uptick in RIA deals reflects a growing sophistication on the part of advisors who are making it part of their growth strategy, says David DeVoe, Schwab Advisor Services managing director of strategic business development.

Schwab shows the slowing activity of
aggregators, rise of RIAs as buyers

“RIAs continue to flex their M&A muscles,” says DeVoe, who notes that Schwab draws on information from its 150 salespeople and 6,000 for its research. “Not only do they do more deals but their sophistication in M&A continues to evolve.”

Buybacks

The Real Deals report mentions that Wealth Trust and Boston Private Wealth Management sold firms back to management and, in fact, buybacks were 11% of deals in 2009 and 8% on 2010.

According to the FA Insight study, RIAs completed about half of the deals. That was up from the 25% of the total completed by RIAs in 2007, when serial buyers — and even banks — were still flying high in the marketplace.

The FA Insight study also looked more deeply at the trends among serial buyers. The number of deals completed by serial buyers fell to 25% from 33% of the total.

A field of 30 aggregators has narrowed to a handful that are truly active, Inveen says.

Graph from Pershing’s Real Deals study

The Real Deals report also puts serial buyers into three categories and identifies members of each category that it sees as showing strength. In the “synergistic” category it puts United Capital of Newport Beach, Calif. In the “financially motivated’, it puts Focus Financial and in the “upfront capital” category it places Mark Hurley’s Fiduciary Network LLC and Asset Management Finance LLC, which invested $15 million in HighTower. See: Weissbluth lands war chest for HighTower Advisors

David Selig, principal of Advice Dynamics Partners of San Francisco, says that there are still questions needing to be answered about serial buyers. He wonders whether the decline in deals is indicative of a deeper problem with the business model.

Needs to be written

“It’s time to see a case study from one of the non-RIA buyers that their model is working. This could be a snapshot of a firm that has been acquired, and the demonstrated results from the seller’s perspective. Since none of the major roll-ups have had a liquidity event yet, that case needs to be written too.

“There’s a lot of competition now from regional players and large, sophisticated RIAs,” he adds. “So, as is the situation for all acquirer types, roll-ups have to demonstrate their value.”

Inveen says he’s convinced that some of the bigger serial (non-RIA) buyers are cracking the code.

“I’m not writing off serial buyers. We’re seeing survival of the fittest. You’ve got to have a good business plan and be prepared to work with the firms you acquire and be well-capitalized.

“Focus and United Capital clearly have some staying power; it’s the second tier that tends to come and go.” See: After one-year hiatus, Focus Financial buys a large RIA and hits a milestone and United Capital scoops up a $1.6 billion wealth manager from M&T

Cautiously optimistic

Both DeVoe and Inveen are cautiously optimistic about whether the long-awaited merger boom of RIA practices will ever happen. See: Fidelity races to develop M&A program ahead of looming merger boom.

DeVoe allows that 2011 could fall below 2010 because 2010 was bolstered by deals that got held up by the 2009 market conditions but finally closed in 2010.

Inveen says the next big boom year is simply not on the horizon.

“I don’t know if we’ll ever see the level of 2007. That was a sort of perfect storm. A lot of buyers were entering the market rather blindly.”