More than six and ten leaders of RIAs expect M&A activity in the space to rise in the coming year, according to responses from a just-released survey by DeVoe & Company, a consulting firm for wealth and investment management institutions. The results contrast with DeVoe survey results from the previous year, when 75% of advisors expected there’d be a decline in such activity due to the COVID-19 pandemic.
The DeVoe M&A Outlook Survey analyzed responses from 131 senior executives, principals or owners of RIAs submitted between Sept. 2 and Oct. 28 of last year, with the amount of managed assets of these firms ranging from $100 million to more than $5 billion.
In the survey, 47% of respondents believed M&A activity would “rise somewhat” in the coming year, while 16% expected it to “rise considerably.” 34% of respondents said they expected acquisition activity to remain stable in 2022, while only 4% predicted there’d be decline. In its reporting on the results of the survey, DeVoe quoted Wealthspire Advisors CEO Mike LaMena, from a recent DeVoe summit on M&A activity, who noted that “deals beget deals.”
“When RIA leaders see others selling, it causes many to reflect on their situation,” he said.
2021 marked the eighth consecutive year of record M&A activity, totaling more than 200 transactions for the first time in the industry’s history, and more than 230 expected in the total year (up from only 36 in 2013). According to DeVoe, 64% of 2021 transactions through the third quarter included sellers with $500 million or more in AUM, with nearly 50% of sellers being RIAs with $1 billion or more in managed assets.
Six in ten advisors responded that they hoped to grow through acquisition within the next two years, and the larger the firm, the higher that likelihood became; according to the survey, 90% of firms with more than $3 billion intended to acquire more in the coming years. But the appetite for acquisition also increased among smaller firms with less than $500 million AUM, according to DeVoe.
“While only 38% of firms that manage less than $500 million AUM expect to acquire another RIA, this is nearly four times the number that said they made an acquisition in the prior two years,” the survey read. “Smaller firms, witnessing the increased number of acquisitions, see M&A as a logical way to accelerate their growth and business goals.”
Survey results showed that acquiring talent and growing client and asset totals were the two most popular reasons firms pursued acquisitions. But more than seven out of ten respondents believed the biggest challenge in becoming a buyer was finding the right partner, compared to 42% who worried about buyers and sellers not agreeing on an appropriate price and 19% of respondents who worried there would not be enough time to make a deal.
For those businesses (and business leaders) considering selling, more than six out of ten respondents said inquiries into buying their firms increased somewhat or significantly compared to previous years, with more than one-third fielding at least 10 inquiries in the last year.
Prospective sellers said liquidity and growth were the main motivations for considering selling externally, at 49% and 47% of respondents, respectively. Notably, growth was by far the largest driver to sell among RIAs with more than $3 billion in managed assets; for those RIAs under $500 million in AUM, scale and succession were the leading rationales to sell.
While many sellers might hope to sell their firm internally, 56% of leaders responded that the lack of succession planning was a sizable future problem for the industry, up from 48% in 2018. Larger firms tended to see this as a more pressing issue; 70% of respondents with more than $3 billion in AUM saw it as such, compared with 45% of respondents with less than $500 million in managed assets.
Additionally, 30% of respondents were confident that the next generation of their RIA could not afford to buy out its founders, with 32% unsure if that next generation would be able to find the funds (on the other hand, 38% of respondents believed the next generation would indeed be able to afford a purchase).