RIA Merger Activity Vigorous in 2013

A new analysis from Charles Schwab finds the sum value of mergers and acquisitions transacted by registered investment adviser (RIA) businesses neared $44 billion in 2013.

The data comes from Schwab Advisor Transition Services, a unit of Charles Schwab that works with advisers to set growth strategies and plan exits from a business line or channel. The firm says it observed 54 completed merger and acquisition (M&A) transactions in the RIA space last year, according to industry-wide data collected and analyzed by Schwab researchers. The deals totaled approximately $43.6 billion in assets under management (AUM).

Charles Schwab says RIAs emerged as the leading buyer category in 2013, representing about 44% of overall deal activity for the full year. Financial firms devoted to strategic acquisitions, which led the buyer category in 2012, represented 32 % of transactions in 2013, down from 53% in the year before. Across all deal types, Schwab finds there was a 20% increase in transaction activity in 2013 compared with 2012, although overall acquired AUM decreased by 26% from 2012.

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Schwab finds the pace of deals was not steady in 2013; the second half of the year closed with 36 completed deals totaling $28.2 billion in AUM, which doubled the pace of 18 deals completed in the first half of 2013.

“We saw a healthy, consistent amount of M&A activity in the RIA sector last year as the independent model continued to be a destination of choice for advisers and more firms looked to fast track their growth,” explains Jonathan Beatty, senior vice president of sales and relationship management, Schwab Advisor Services. “There was an identifiable trend last year during the second half of 2013 in which larger firms acquired smaller and mid-size firms, an indication that firms across the spectrum looked to M&A as a means to quickly expand their footprint.”

According to Schwab’s data, the second half of 2013 showed smaller RIAs employing M&A as a growth strategy. The trend, Schwab says, reflects findings also seen its 2013 RIA Benchmarking Study, in which 25% of firms with between $100 million and $250 million in AUM reported to be actively looking to acquire another firm.

But not all the merger activity involved smaller advisory firms purchasing competitors or partners, the data shows, with substantial acquisition activity coming from both larger firms and new players looking to enter the independent advisory space. For instance, one large deal announced in early 2014 between RCS Capital Corporation (RCAP) and Cetera Financial Group, valued at $1.15 billion, expanded RCAP’s relatively new and small adviser footprint by some 6,600 new representatives and added $145 billion in AUM. RCAP says the acquisition puts it in position to be the second- or third-largest independent advisory network in the U.S., based on number of advisers.

More information is available at www.aboutschwab.com, and on the Schwab Talk blog.

Time Is Ripe for Pension Strategy Changes

In a stronger position, new choices are being made in the management of pensions in Russell Investments’ $20 billion club.

The $20 billion club consists of 19 corporations that together represent roughly 40% of the pension assets and liabilities of all U.S. publicly-listed corporations. Their combined pension deficit had been growing in recent years as interest rates have fallen. But 2013 saw a sharp reversal of that pattern, with more than $100 billion wiped off of the deficit thanks to strong asset performance and a rise in interest rates of almost 0.9%.

According to Bob Collie, FIA, chief research strategist of Americas Institutional at Russell, the median discount rate used to value U.S. plan liabilities—which had fallen from 6.4% to 4.0% in the previous four years—rose to 4.89%. This alone accounted for a gain of some $69 billion. Helped by another strong year on the asset side and plans sponsor contributions, this meant that over 40% of the deficit was wiped out; the net shortfall of assets below liabilities fell by some $106 billion.

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Investment returns—which totaled almost 9%—comfortably outpaced the interest cost on liabilities. Contributions from plan sponsors were around $27 billion, which was almost double the value of new benefit accruals. While only Bank of America has worldwide pension assets in excess of liabilities, that goal is now within sight for a number of these corporations.

“This improved position is affecting how plans are being managed,” Collie says in a recent article. Smaller shortfalls mean smaller contributions, less investment risk and a growing emphasis on defined contribution.

From a low of $12 billion in 2008 (less than the value of new benefit accruals that year), plan sponsor contributions averaged more than $25 billion a year from 2009 to 2013 due to catch-up contributions required as a result of the losses of 2008. But as deficits shrink, the need for continued catch-up contributions also shrinks.

MAP-21 may also have some effect on contribution levels in 2014 (see “The Impact of MAP-21”). As a result, expected contributions for 2014 disclosed in the latest reports came to some $14.3 billion. “With a combined total shortfall of $114 billion, catch-up contributions will continue to be required from several of these corporations for the next few years, but probably not at the level that seemed likely a year ago,” Collie says.

With the improved funding position, many plans are moving to liability-driven investing (LDI). For example, according to Collie, Ford’s 10-K filing with the Securities and Exchange Commission notes that they have “adopted a broad global pension derisking strategy” as a result of which they expect to reach an 80% fixed income allocation in the U.S. “over the next few years as the plans achieve full funding”. In a similar vein, United Technologies’ 10-K notes that “the interest rate hedge is dynamically increased as funded status improves.”

Collie points out that one observation that came out of last year’s analysis of the $20 billion club was that the 2012 liability value of $915 billion was possibly as large as the liabilities were ever going to get. “Those liabilities fell by more than $73 billion in 2013 and, barring a substantial drop in interest rates, it looks like 2012 was indeed ‘peak pension’: America’s private sector defined benefit system is now officially shrinking,” he says.

As of the end of 2012 (the most recent publicly available data) the defined contribution plans of the $20 billion club totaled about $400 billion in the U.S. alone; less than the defined benefit assets of these corporations, but catching up fast. “The $20 billion club is a club that was chosen based on the size of defined benefit plans, but even here we see the steady rise of DC,” Collie says.

The 19 corporations that make up the $20 billion club are AT&T, General Electric, Northrop Grumman, Bank of America, General Motors, Pfizer, Boeing, Dow Chemical, Hewlett-Packard, Honeywell, Raytheon, United Parcel Service, E.I. DuPont de Nemours, IBM, United Technologies, Exxon Mobil, Lockheed Martin, Verizon Communications and Ford.

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