Bigger RIA deals in first half of year, but prices soft compared to early "08

RIA client assets that changed hands through acquisitions soared in the first half this year, but valuations of the firms are still below the 2008 peak. Not surprisingly, registered investment advisers 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 RIAs took place in the first half of this year, compared with 30 in the same period last year. The deals this year represented nearly $21 billion in assets under management, or an average of $770 million in assets per transaction.That is a substantial jump — 68% — from the first half last year, when the total assets were $12.4 billion, or an average of $412 million in assets per deal.

VALUATIONS DEPRESSED

Despite the boost in assets under management changing hands, valuations for firms remain mostly depressed. Although prices rose a bit from the decline of 2009 and last year, 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. Mr. DeVoe expects mergers-and- acquisitions 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, he said. “The bigger RIA firms are more attractive to the banks,” and their return to acquisitions helped drive the trend to larger firms being sold, Mr. DeVoe said. It is difficult to give valuation metrics because each deal is different, but in general, valuations for firms of about $100 million in assets under management range from four to six times cash flow, Mr. DeVoe said. Firms with about $500 million in assets go 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. Email Lavone Kuykendall at lkuykendall@investmentnews.com