Valuations up as RIA deals near record

United Capital Financial Advisers LLC's purchase of Peak Capital Investment Services LLC last week is a sign of the times. Despite the volatile markets, mergers-and-acquisitions activity among registered investment advisers continues to be strong this year, said David DeVoe, managing director of strategic business development for Schwab Advisor Services. “The fourth quarter is off to a strong start, so there is the potential to have a very good and possibly record year,” he said at Charles Schwab & Co. Inc.'s Impact conference in San Francisco. With national consolidators such as Focus Financial Partners LLC and private-equity firms becoming more active in the market and RIAs looking to grow, 44 transactions were completed by the end of the third quarter this year, with a total of $38 billion in assets in play. A record 70 deals were struck last year involving assets of $62 billion. To some extent, the high number of deals last year was a result of market volatility in the previous two years, according to Mr. DeVoe. “With the decline in the markets, advisers were more focused on their clients and stepped away from negotiations. It created pent-up supply that resulted in more transactions coming to fruition last year,” Mr. DeVoe said.

FOSTERING ACQUISITIONS

One factor contributing to the activity is that firms with a national consolidation strategy, such as Focus Financial, are fostering acquisitions by their affiliated firms “We're starting to see the affiliates make acquisitions with the national firm bringing capital to the table,” Mr. DeVoe said. Valuations on the deals are still off the highs set in early 2008, but they are also off the lows of 2009. The larger the firm, the higher the valuation of deals. A $100 million firm typically sells for from four to six times cash flow, while a $500 million firm gets five to eight times cash flow. “As the markets demonstrate stability and the RIAs demonstrate growth, the valuations will rise,” Mr. DeVoe said. With many aging financial advisers looking to plan their succession, mergers represent one of the best alternatives. Mr. DeVoe cautioned that RIAs need to consider the cultural fits with other firms or large acquirers before they make a deal. “They need to be aware upfront of the cultural and social aspects of a combination,” Mr. DeVoe said. “RIAs should be thinking about how their people and client bases fit with a potential merger partner from Day One,” he said. Email Andrew Osterland at aosterland@investmentnews.com