Family Wealth Report speaks to AssetMark about trends related to consolidation in the RIA space.

Despite heightened M&A activity in the RIA space, with many players continuing to demonstrate buying power, consolidation activity has failed to meet the expected spikes that many industry observers predicted (source: Schwab Advisor Services).

Mike Abelson, executive vice president of corporate development at AssetMark, recently spoke to Family Wealth Report about some of the trends behind this phenomenon.

AssetMark provides investment and consulting solutions for 5,000 to 6,000 independent advisors. Abelson works closely with the firm's strategic planning and executive team to identify and engage M&A opportunities, with a focus on asset management, technology and other advisor services.

He started by noting that it is often unclear when a transaction is occurring, or has occurred, in the advisor space.

“Many practices are being transitioned to employees or family members,” Abelson said. “Rarely is it a very clean and clear sale between two parties with a distinctive start and end date.”

He acknowledged that there is, however, “a lot of activity going on.” Indeed, the volume of RIA M&A deals rose in the second quarter of 2014, with 29 deals completed totaling $32 billion of assets, according to figures from Schwab.

But data available probably isn't reflective of the number of advisors who are working through succession plans or developing and running their transition strategies, Abelson said.

Jonathan Beatty, senior vice president of sales and relationship management at Schwab Advisor Services, previously said that while RIAs seem to be in a good position to monetize their firm's value, they are more often looking to preserve the owner-operator model and retain their independent through internal succession.

“And with the aging population, what I think we are seeing is more and more advisors joining forces to leverage each other's capabilities, versus selling practices or transitioning,” Abelson said.

Meanwhile, the industry as a community is seemingly shrinking, he continued, attributing this to a lack of new entrants in the space. But assets and investor needs are not; in fact, they are growing.

Looking ahead

As reported by this publication in July last year, RIAs achieved record growth and enjoyed a level of profitability not seen since 2006, according to Schwab's 2014 RIA Benchmarking Study.

Based on AuM, RIA firms of all sizes saw “remarkable growth” since the market lows of 2009, Schwab said, highlighting that 36 per cent of all firms have doubled their AuM and revenues since then. The median firm realized a 12.8 per cent compound annual growth rate in AuM and 13.6 per cent in revenues.

Similarly, AssetMark has observed that practice valuations are at all-time highs, meaning they are generally in good health, while the cost of borrowing is also quite low (if you can find the right lender.)

There is certainly interest among advisors for buying other practices, but not many are “are up for sale,” so to speak. “So there is significant demand,” Abelson said.

Thinking about what shape the industry may take over the next few years, and which factors are likely to drive this, Abelson anticipates fewer but bigger practices.

“More advisors are thinking about their succession plans and how to leverage technology, partnerships and infrastructure to serve more clients without creating additional costs,” he said. “There have been great leaps forward in technology and tools to engage clients and I think the trend we will see is the one we are on: a shrinking number of practices, bigger 'ensembles' and more professional business-like infrastructures.”

According to Abelson, this will create more consistency, which he believes is good for end-clients.

“One of the things we have learnt from the recent entrance of 'robo advisors' is that the visualization of technology and the technology itself can be very consumer-friendly,” Abelson said. “I think it’s all very complementary: this is a very human business.”

He anticipates that technology, coupled with a human overlay, is very powerful. “I think it will be a real engine for advisors to grow their practices, and for clients to receive superior service over time.”