Banks Retreat from Buying RIA Firms, Even as Deals Flourish—Report
Announced mergers and acquisitions among registered investment advisory firms in 2019 reached a record for the sixth consecutive year, but the size of the acquired RIAs plunged, according to investment bank DeVoe & Company, which specializes in RIA mergers.
The report was published as Creative Planning, one of the more active RIAs in the acquisition game, said Tuesday that it purchased Stratford Consulting, an Addison, Texas-based RIA with approximately $618 million in assets under management.
The DeVoe report’s surprising finding that deal size shrank last year—notwithstanding Goldman Sachs’ purchase of United Capital Financial Advisers, Charles Schwab’s deal for USAA Wealth Management’s brokerage assets and Schwab’s pending deal to buy TD Ameritrade— largely reflects the trend toward sub-acquisitions. Those are deals made by smaller firms that had themselves been previously acquired by RIA “rollups” such as Focus Financial Group and Mercer Advisors.
“[They] give you the tools and the capital to go acquire,” DeVoe, a former Charles Schwab RIA custody executive, said in an interview. “Those sub-acquisitions are typically in the $100 million to $500 million range, so there is additional downward pressure.”
The size of target firms announced in 2019 fell by more than 40% to $347 billion from 2018, according to the study, which tracks deals of sellers with over $100 million to under $5 billion of assets. (Firms above the cutoff are considered to be asset managers more than wealth management firms.) The average sub-acquisition size in 2019 was between $400 million and $450 million, about half the size of other deals in 2019, according to the study.
The total $494 billion in the record 2018 AUM year was disproportionately impacted by private equity firm Hellman & Friedman’s acquisition of Financial Engines, and its $170 billion of assets, according to the DeVoe report.
Another significant trend outlined in the report was the withdrawal of banks from the fast-growing RIA wealth market. Investment bankers hungry for deals have for years talked up regional banks’ appetite, but they captured a mere 2% of all the transactions last year.
The report traced the retreat to the “colossal” dissolution of First Republic Bank’s hallmark 2012 deal to buy Luminous Capital, a California firm founded by former Merrill Lynch brokers. The Luminous partners who were managing about $16 billion left last summer to former two separate RIAs, and First Republic executives said they expected them to take 88% of their assets with them.
“The frightening magnitude of this outcome will likely have a chilling effect on banks’ interest level in the space for years to come,” the DeVoe report said.
The California advisory firm said it “witnessed the unravelling” of a $1-billion-plus deal as the bank buyer’s board of directors “became spooked by the vivid image of every buyer’s greatest fear.”
While giants such as Schwab, Goldman Sachs and private equity firm Oak Hill Capital (which bought Mercer Advisors in 2019) dominated the list of acquirers doing big deals in 2019, smaller RIAs such as Creative Planning looking to grow through consolidation also are significant buyers. Together with RIA aggregators such as Focus, they accounted for 83% of all 2019 transactions.
Susan Schildt, the managing principal of Stratford Consulting, said she chose to affiliate with the Overland Park, Kan.-based Creative because of its still-small profile.
“As a boutique comprehensive financial planning RIA, we did not anticipate finding that a national firm would be a fit for us,” she said in a prepared statement. “In Creative Planning we have found a company with deep resources and an outstanding reputation that also shares our view of how to best treat and work with clients.”