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RIA M&A Trends Down, But Far From Out

It may be the first year in nearly a decade that the RIA market doesn’t break records, but industry trackers expect it will remain heated as private equity, new players and synergistic opportunities abound.

The second quarter of 2023 was the slowest the RIA M&A market has seen since early 2021, suggesting this may be the first year in nearly a decade that dealmakers don't reach a new height in total transactions.

That may not be a surprise, given a year of unprecedented Fed rate hikes, already lofty valuations in the broader markets raising eyebrows, and an inflation rate that, though softening, may temper enthusiasm for new deals.

But industry watchers say the declining pace of activity doesn’t mean a return to the previous decade which, in the best years, saw about a third of the deals expected in 2023—but it does suggest the landscape is changing as new economic realities influence the market, a wider circle of players are participating and new structures and synergies come to the forefront.

Echelon Partners reported a 28.6% drop—from a total of 91 deals in the second quarter of last year to just 65 this year. DeVoe & Company recorded a 14.9% decrease in activity—from 67 deals to 57. MarshBerry and Fidelity Institutional both saw dealmaking decline by a little more than a fifth over the year-ago quarter, from 77 to 61 by MarshBerry’s count and from around 60 to 48, according to Fidelity.

Echelon Partners and MarshBerry are investment banks and business advisory firms supporting the financial services industry. MarshBerry comes at the industry from the insurance side, with an expanded lens on retirement and wealth management, while Echelon works with wealth advisory and financial technology firms, as well as investment product managers and distributors.

DeVoe is a boutique consultant, providing advice, analysis and M&A support specifically to RIAs. Fidelity Institutional provides clearing and custody, technology and trading services to independent financial advisors, banks, broker/dealers and family offices.

Each firm varies in the way they qualify and count RIA deals, leading to the divergent tallies, but trendlines remain consistent. 

Year-to-date declines were a little less drastic, ranging from 2.5% by Fidelity’s estimates to 22.3% according to Echelon. DeVoe and MarshBerry both saw half-year totals fall by about 11%.

Only Echelon offered a year-end prediction, adjusting its first quarter forecast down to 300 deals—a 12.3% drop from the record-breaking 342 the firm tracked last year. Others acknowledged the quarterly slowdown suggests a fewer number of total transactions are likely, but all pointed to reasons for optimism that deal activity would remain robust, and highlighted a few developments likely to shape RIA M&A over the coming years.

Despite higher interest rates and a sticky, but slowing, pace of inflation, expectations for continued activity in the wealth management industry stem from many of the same marquee reasons that fueled activity over the past ten years—interest from private equity and other capital partners pouring billions into firms with inorganic growth strategies; a wave of aging principals looking for monetization and succession plans; and the heated pursuit of talent, scale and added services in an increasingly competitive landscape.

This year has also seen new entrants on both the buyer and seller sides, indicating no shortage of potential opportunities even as some of the more active and leverage-dependent buyers may be taking a breath to focus on integration, recapitalization or amending their approach.  

“Capital markets created challenges for some and made debt financing more expensive and less accessible for nearly all,” according to MarshBerry Managing Director of Wealth Kim Kovalski. “As a result, firms are more closely scrutinizing their inorganic growth strategies, looking for businesses that better align with their unique strategies and capabilities and focusing on integrating the firms previously acquired.”

Noting that buyers say deals are taking an average of seven months to close, Fidelity suggested the full effects of current market conditions and higher interest rates have yet to be seen.

“The second half of 2023 may be our first litmus test of deals initiated with 2023’s higher cost of capital,” wrote the report’s authors.

“We believe that the fundamental reasons for M&A remain, namely the need to add services and scale to effectively compete and delight clients, offload important but non-client facing work, and plan for or employ succession,” they added, pointing out that private equity investments tend to also support strong inorganic growth initiatives.

A handful of private equity investors entered the space for the first time this year, including Crestview Partners, which invested $200 million in the leadership team of Modern Wealth Management before the firm had any clients, and Golden Gate Capital, which took over a minority investment in Parallel Advisors from Emigrant Partners early this year.

Altas Partners, which has owned a piece of the insurance brokerage firm (and an acquirer of wealth management and retirement practices) Hub International since 2018, bought a minority stake in Mercer Advisors. Harvest Partners, which is likewise invested in a holding company and insurance brokerage that make investments in RIAs, also bought a piece of Mercer in its first direct investment into the space. And Audax Private Equity picked up Congress Wealth Management from CI Financial in its first U.S. RIA acquisition, following an investment in Canadian firm Harbourfront Wealth Management last year.

According to Echelon, close to 73% of transactions so far this year (about 102 deals, according to Echelon's metrics) have been direct private equity investments or involved RIA buyers with private equity backing, while MarshBerry estimates that 65% of all 2023 deals (89, according to their methodology) have been transacted by buyers with private equity support—including 11 first-time direct investments and two recapitalizations.

“If this trend continues, 2023 may hit a record for private equity investment in wealth firms,” MarshBerry speculated.

“We like this space a lot,” said Neil White, president of HGGC, a middle market private equity firm focused on the consumer, business services, technology and financial services sectors. HGGC currently holds minority stakes in Merit Financial Advisors, Waverly Advisors and Apella Capital.

“To us, it’s an exciting opportunity,” he said. “We have always been intrigued by businesses that have the opportunity for growth in really fragmented markets and that have the opportunity to solve really important customer needs, and RIAs are able to both help individuals and build really interesting businesses.”

All the top acquirers on every list have taken on at least one capital partner, including Focus Financial, Hightower Advisors, Wealth Enhancement Group, Merit Financial Advisors, Beacon Pointe Advisors, Cerity Partners, Captrust and Allworth Financial.

Fidelity and Echelon both noted that transaction sizes are on the upswing after falling in 2022 for the first time in several years. According to Fidelity, 42% of deals done in the second quarter were acquisitions of firms with more than $1 billion in managed assets, while Echelon tallied closer to 57%.

Smaller sellers are still active, however. DeVoe counted 57 transactions through the first half of the year in which firms with between $100 million and half a billion dollars were sold.

“Conversations with investment bankers in the industry inform us that acquirers are intentionally looking to move up-stream in the M&A marketplace to move the needle from an asset and talent perspective as larger firms tend to have expertise and specialized skill sets, a good client base, regional market share, a track record for success, and competitive advantages,” according to Fidelity.

“We saw RIA firms purchasing large adjacent practices, such as tax and accounting, and consulting practices, to expand their set of services beyond financial planning and wealth management, a trend we believe may likely continue,” the report’s authors added.­­­­­­­­

Examples include Creative Planning's acquisition of $5.5 billion AUM BerganKDV in June, Hightower's addition of a CPA practice to its wealth solutions platform in July, and Mariner Wealth Advisors addition an Arizona team to its existing family of affiliated tax practices.

MarshBerry pointed out the demand for retirement consulting and advisory rose by 20% over the first half of last year from 15 transactions to 18—two-thirds the number of total retirement acquisitions in 2022. Most were driven by insurance brokerage acquirers looking to create cross-selling opportunities, but a handful of RIAs have gotten in on the action this year, including Carson GroupCaptrust and Sageview Advisory Group.

Savant Wealth Management has done multiple deals on both fronts this year, adding an Atlanta-based firm with retirement planning and CPA capabilities in its largest deal ever in February, announcing two retirement acquisitions in June and picking up a tax and accounting business in July.

“I really believe the expansion of services has become the most important trend in wealth management over the last few years,” said John Langston, managing partner at Republic Capital Group and the investment banker behind Creative Planning’s acquisition of BerganKDV. RCG has begun to lay the groundwork to help firms looking to add complementary practices, hiring a law firm specialized in CPA transactions to train the firm’s in-house counsel.

“Firms should see this as a moment where at least a small alarm goes off,” he said. “‘Hey, the competition is going to expand services and our clients are going to have the option of choosing firms that can do a lot more.’

“It doesn't mean that every firm should try to do everything,” he said. “I don't think that's necessary but, to me, it's still the biggest trend in wealth management.”

MarshBerry’s Kovalski said larger, private equity backed firms are developing infrastructure and adding services in-house largely to attract acquisition targets, simultaneously achieving benefits of scale that make it increasingly difficult for smaller advisors to compete without partnering.

She also said there has been a trend toward RIAs building revenue streams that are not wholly AUM-based—alternative fee structures like subscription services, per-service charges, and hourly rates, among others—but that the jury is still out on whether those business models have traction. 

“Specifically regarding accounting and CPA firms, some are exploring it and are finding that it's a good solution for them and others are finding that it's a better outsourced solution,” Kovalski said. She pointed out those businesses tend to have smaller margins, lower valuations and less sticky clients, making them trickier to successfully integrate. 

“Some are ... divesting because they want to have the service but are starting to wonder whether they really want to have it in-house because it's generally a loss leader," she said. "And there's absolutely nothing wrong with outsourcing. Because you don't have to own it to be able to deliver the experience to your client.”

Adding retirement advisor services is an easier argument for RIA principals to make, given those firms share more characteristics with traditional wealth management models.

Kovalski said the pursuit of diversification in other areas, such as new geographies, market segments or investment solutions, represent more dependable drivers of ongoing M&A activity.

“Acquirers continue to proceed according to their inorganic growth plans, albeit now with an increased intentionality,” she concluded in her report. “While sheer scale, both in revenue and AUM, remain table stakes for sellers, the demand for embedded talent and sustained organic growth has increased commensurate with the industry’s broader challenges.

“There are numerous factors at play on both sides of the equation, but all things considered there is cautious optimism that the consistency in transactions will continue through the back half of 2023.”

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