RIA M&A activity sizzles toward a record number of deals in 2010

Mergers and acquisition activity in the RIA market is setting a record pace in 2010 — as measured by number of transactions — through three quarters. M&A activity appears poised to break the old record set in 2008 for a 12-month period, based on industry-wide data compiled by Schwab Advisor Services.

There were 70 deals totaling $85 billion of assets under management completed through Sept. 30, a big jump of 43% from the 49 deals completed during the same period in 2009, it adds.

Yet the average deal size year to date is down to $1.26 million [from last year’s $1.52 million], according to Schwab.

In all of 2009, there were 71 deals totaling $103 billion in assets under management.

The San Francisco-based custodian completes the M&A compilation every quarter, and it is the only known effort made to tally deals in the industry on the schedule. Critical M&A specialists and industry consultants have said in earlier interviews that they are certain the results may not encompass all deals.

Discreet deals?

These market observers say that many deals get done so discreetly that Schwab cannot know about them. Schwab has responded by saying that it consistently uses the same methodology. This would suggest that its results are a proxy for the health of the RIA M&A market.

David Selig, CEO of Advice Dynamics Partners, a Mill Valley, Calif.-based M&A firm for RIAs, says the deal market has definitely improved.

“We’ve seen a noticeable uptick in M&A activity this year. In general, valuations have stabilized and the market has cooperated, so sellers feel more confident about dipping their toes in the water,” he says.

David DeVoe, managing director, strategic business development for Schwab Advisor Services, who oversees his company’s M&A data, says that he believes the deal-making market is healthy right now. But he adds that 2010 is complicated to analyze because last year was thrown off by subdued equity markets.

2010 RIA M&A deal activity is
on pace for a record

Not only were sellers discouraged by lowered valuations in 2009, but RIAs who were engaged in deals as markets tanked stepped away from the negotiating table to hold the hands of clients.

Thumping to life

Some of those delayed 2009 deals thumped back to life in 2010 and may be a significant reason why this year’s 70 deals eclipsed the 58 transactions completed in the red-hot first three quarters of 2008 — not to mention the 53 deals done during that period in 2007. In 2006 and 2005, there were 44 and 31 deals done respectively during the first nine months of those years.

Selig believes that the RIA M&A market could continue to improve.

“As the liquidity crunch thaws, we expect to see even more activity,” he says.

Buyer leadership continues to flow to
the RIA

Three signs DeVoe observes for why next year could still outpace 2010 are:

a.) M&A webcasts produced by Schwab have jumped from 10-12 participants at this time last year to more than 200 this year.

b.) Buyer and seller listings through Schwab’s matching service are both up 50%

c.) Email chatter on the matching site is up more than 100%

He adds that the biggest category of buyers this year are RIAs themselves – outpacing consolidators or “rollups.” But the 20-25 rollups in the market were stronger in the third quarter of 2010 than last year during the same period.

“The consolidation model is still resonating with RIAs but some have made the strategic decision to move to the sidelines,” DeVoe says. “In 2007-2008, most aggregators were getting deals done.”

DeVoe says that if an RIA owned by a rollup makes a purchase that its counted as an RIA purchase, not a rollup purchase.