Dealmaking experts expect a further surge in RIA mergers and acquisitions, even though recent experience may have made some midsize firms hesitant to rush into their next purchase.
That's what consulting and valuation firm DeVoe & Co. reported this month in its latest
But optimism about dealmaking wasn't spread equally among all types of firms. Large practices with $1 billion or more under management were far more likely to foresee making at least one acquisition in the coming year.
Seventy-three percent of the respondents falling in that $1 billion-or-more category thought it likely they would buy at least one firm, down only slightly from the 75% who said the same thing in the previous survey. Among respondents with $100 million to $1 billion in assets, though, only 42% foresaw making at least one acquisition in the coming year. That was down quite a bit from 52% who said the same in the previous year.
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The decline was likely the result of some firms finding their previous M&A deals were harder to pull off than perhaps initially thought, the DeVoe report said.
"It is likely that the shift among RIAs can be partially attributed to greater awareness of the complexity and investments required to execute an acquisition," according to the report. "Although a majority of firms still expect to acquire a firm during the next 24 months, a growing number are deciding that there are better ways to achieve their goals."
Merger (and acquisition) madness
Industry consolidators had $1.5 trillion in assets under management in 2023. That, according to Cerulli, came to 18% of the industry's total asset share, a figure up 10 percentage points since 2018.
Many are taking a look at the special services sellers might provide — such as holistic financial planning, business-exit planning and tax planning — and then paying more if those complement or supplement their current business.
"There is a lot more of an emphasis on curation, trying to align the right buyers with the right seller, rather than having a blind auction," Nash said.
2024 a record setter for M&A deals
After
The asset management giant Fidelity Investments, which only tracks M&A deals that come with a press release,
The number of firms completing acquisitions has risen over the past decade, even as the number of RIAs has also gone up. Fidelity found 78 firms completed deals last year, up from only 46 in 2015. The number of RIAs registered with the SEC has gone from 11,847 to 15,396 in the same period.
The competition for acquisitions has been driving prices up. That's especially true as many of the deals are being driven by private equity buyers. Fidelity found that 89% of the deals in 2014 were undertaken by firms with private equity backing, up from 39% in 2019.
Nash said he is also seeing an increase in advisors who are leaving wirehouses and selling their books of business directly to RIA purchasers. He acknowledged that competition for M&A deals has pushed purchase prices upward, but he had no big concerns about the industry's long-term prospects, with firms' profit margins remaining high and their annual revenue growth strong.
"The reason for all this consolidation is that the underlying economics of many of these companies over the next 10 years is incredibly opportunistic," Nash said.
Last year, the two biggest acquirers were Focus Financial and its affiliates, which did 21 deals, Wealth Enhancement Group, which did 12. Focus, which has more than $400 billion in client assets, receives backing from the PE firms Clayton, Dubilier & Rice and Stone Point Capital. And Wealth Enhancement Group, which has more than $103 billion under management, is supported by
Economic conditions are expected to make deals a little easier to complete this year. DeVoe predicts the Federal Reserve will most likely reduce interest rates again, holding down the cost of financing M&A. And high valuations spurred on by competition among acquirers will help ensure sellers can receive attractive prices.
Firms eye their growth prospects
DeVoe found the main reason RIA owners may look to acquire firms is to boost their growth — defined as additions of both new assets and clients. Eighty-five percent of the respondents cited growth prospects as the main reason they would consider doing M&A deals this year, up from 74% who said the same in 2023.
The next two most popular answers — acquiring talent and moving into new geographic locations — showed declines from year to year. Only 65% of the respondents cited the need for new talent, down from 76% in 2023, and only 49% cited a desire to extend into new markets, down from 57%.
On the seller's side, RIAs also cited growth as the main reason for entering into mergers and acquisitions. DeVoe said many firms have seemed to have abandoned — perhaps foolishly — the idea that they should build their business on their own without relying on outside deals. Such "organic growth" is often achieved through marketing campaigns to bring in new clients and carefully made plans to reduce costs and eliminate redundancies.
The report finds many firms are recovering from a "self-inflicted" wound caused by cuts to their marketing and business development budgets.
"One might surmise that a growing number of advisors are giving up on organic growth and are consequently seeking to sell to a firm that has figured it out," according to the report.
M&A in succession planning
One reason to enter an M&A deal continues to not receive enough attention, DeVoe wrote. Too many advisors still have no plans for what will happen to their practices after they retire.
This lack of planning is compounded by the fact that the rising price of RIAs has put many of them out of reach for employees who might otherwise be interested in buying them. Only 20% of the respondents to DeVoe's survey expressed confidence that the next generation of planners in their firm could eventually buy the business. As recently as 2021, the figure was 28%.
For owners worried about who will take over the practice, a sale to a deep-pocketed buyer offers one way out of the dilemma.
"This affordability gap has become a leading challenge for the RIA community," CEO David DeVoe said in a statement. "This emerging crisis continues to gain momentum, as advisors are not engaging in the succession planning process with appropriate urgency."
