RIA industry deals at record levels

RIA industry deals at record levels: a look behind the numbers

Gain insight into RIA industry deals and the motivations driving buyers and sellers.

The trajectory for dealmaking among registered investment advisory firms has trended upward in recent years as the industry grows and matures. According to Schwab's most recent data, merger and acquisition (M&A) activity in 2015 reached record levels, touching new highs across multiple key metrics.

The numbers are impressive. But they shouldn't be surprising. Looking more closely at Schwab's research, the healthy pace of transactions in 2015 is on par with the industry's steady growth. And, we can safely assume dealmaking will remain strong as more firms employ M&A strategies to achieve growth or succession objectives. Firms pursuing growth opportunities are focused on expansion and diversification of clients, capabilities, and talent. At other firms, leaders are increasingly thinking about how their businesses will continue to thrive even after they are no longer personally involved in the firm.

RIAs and strategic acquiring firms lead in M&A

M&A buyer types image

Source: Schwab Advisor Services

Opportunities for buyers and sellers

The M&A landscape presents opportunities for buyers and sellers alike. As firms grow, many consider M&A as a strategic option for achieving scale quickly. A merger or acquisition can allow firms to expand their client base, tap into new markets, diversify their talent pipelines and add capabilities. Among firms with at least $1 billion in AUM, nearly a third (29%) indicated they’d like to buy an RIA in the next year.1 This, of course, presents opportunities for sellers. As the number of ready and interested buyers in the marketplace grows, it's critical that potential buyers make their value proposition known to like-minded potential sellers.

Most firms want to be buyers

Most firms want to be buyers chart

Commitment to legacy planning

Succession planning continues to be another key deal driver among advisory firms. Internal succession is the most common approach to establishing a legacy; it is an approach that gives firm owners a strong value driver and additional options. Still, according to Schwab's 2015 Benchmarking Study, a significant portion of RIAs are also turning to M&A. In fact, according to the study, 37% of advisors are considering merging with or acquiring another firm as a primary succession strategy, and 27% are thinking about selling their firms as a key strategy.

Schwab study reveals four primary succession strategies

Primary succession strategies chart

As firm leaders age and think about their future, many are considering the opportunity to participate in a transaction that allows them to transition or reduce their ownership and controlling interest in their firm. This can benefit both themselves and their firm. Any consideration must bear in mind the experience of their clients and employees. Continuity is a paramount consideration when weighing M&A as an option—buyers and sellers should consider aspects such as client service beliefs, investment management approach, and company culture. RIAs and strategic acquiring firms combined to make up nearly three quarters of buyer-types last year. That trend will likely continue as potential sellers to share their value proposition with like-minded potential buyers.

M&A: Advisor motivations for selling 

Review these motivations to see if they are relevant to your firm and could potentially influence your long-term strategy.

  • Future focus. Schwab's RIA Firm of the Future Study revealed best practices of future-focused firms, and many indicated that they place a high emphasis on growth strategies beyond referrals, as well as a disciplined approach to long-term planning (looking 10 years ahead).
  • Legacy planning. Maturing founders who have chosen not to pursue an internal succession strategy, yet seek continuity for their clients and employees often view the prospect of aligning with a like-minded company as an attractive option.
  • Adding scale and efficiencies. Many firms leverage M&A strategies to quickly achieve scale enabling them to expand their client base, tap into new markets and compete in the marketplace. M&A can also allow firms to create efficiencies, whether by adding new technology or talent capabilities.
  • Competition. The continued success of the RIA model has attracted new entrants. Some local markets are hotter than others, with some advisors reporting pressure on fees.In these markets, we are seeing more firm consolidation as larger firms benefit from efficiencies of scale, making them less vulnerable on pricing.

The right fit and the right opportunity

There is no one-size-fits all approach to M&A. Every deal is different and firms pursue transactions for various reasons, often as just one component of a broader business strategy.

Still, there are similarities among successful deals, including good cultural fit, complementary offerings, and a shared vision for the businesses between all parties involved. Each transaction calls for an assessment of the needs for various owners and buyers, as well as the individual "independent" nature of the RIA space. The advisors who will succeed with M&A are those who actively prepare for opportunity and then act when the time is right.

We're hoping this article prompted you to consider, or even re-evaluate, the various strategic growth and transition planning options available to you and how they may meet the unique needs of your firm. Ask your Schwab Relationship Manager if our Insight-to-Action consulting program, 'Transition on your Terms' is right for you. Your Relationship Manager can be a helpful resource whether you are interested in internal succession planning or seeking to buy or merge with another RIA.