Assets being snatched up, but valuations of RIAs still depressed

RIA client assets that changed hands through acquisitions soared in the first half of the year — but valuations of the firms are still below the 2008 peak. Not surprisingly, RIAs with the most assets under management are commanding substantially larger cash flow multiples in deals. According to data collected from public and proprietary sources by Schwab Advisor Services, a custodian to independent RIAs, 27 transactions involving registered investment advisors took place in the first six months of 2011. Those deals represented nearly $21 billion in assets under management on the move in the first two quarters. That's a substantial jump — 68% —from the first half of 2010. Indeed, the AUM in the average deal during the first half of 2011 was $770 million. By contrast, the first half of 2010 yielded 30 transactions representing $12.4 billion in assets, or an average deal size of $412 million in assets. Despite the boost in assets under management changing hands, valuations for firms remain mostly depressed. While prices rose a bit from the decline of 2009 and 2010, they “have yet to return to the level of early 2008,” which was the high point for firm valuations, said David DeVoe, managing director of strategic business development for Schwab Advisor Services. The stock market's decline from its 2007 high and the market environment of uncertainty has helped keep prices down, he said. He expects merger and acquisition activity to rise steadily over the next five to seven years. Those deals will be driven by aging firm principals who are growing more sophisticated in valuing their firms, the return of private equity and consolidators to the market and an uptick in purchases by banks after a several-year absence from the market, Mr. DeVoe predicted. “The bigger RIA firms are more attractive to the banks,” and their return to acquisitions helped drive the trend to larger firms being sold, he said. Mr. DeVoe said it was difficult to give valuation metrics because each deal is different, but in general, valuations for firms of around $100 million in AUM range from four to six times cash flow. Firms with around $500 million in assets got for closer to five to eight times cash flow, and firms with $1 billion or more in assets can go for six to nine times cash flow, or even more, he said. Schwab, which has reported on RIA sales for years, has revised its M&A database to focus more tightly on RIA firms that directly serve high-net-worth retail investors and manage at least $50 million in assets, as well as breakaway brokers from wirehouses who received payment for joining an RIA.