Why dealmakers are still making waves in the M&A slowdown

The number of wealth management M&A deals is falling, but the size of firms changing hands is on the rise.

In the past week, private equity-backed acquisitions unveiled by Hightower, Wealth Enhancement Group and Cerity Partners displayed how dealmakers are looking for sellers with scale and specific expertise to fold into their firms. While the volume of transactions in the industry tumbled by 29% year over year to 65 in the second quarter — a two-year low — average client assets per deal jumped 9% over last year's level to $1.76 billion, according to investment bank and consulting firm Echelon Partners.

The trend reflects how conditions remain ripe for consolidation in wealth management, even as macroeconomic forces pushing down M&A deals globally across all industries leave an impact. 

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Macro trends
Since debt financing often plays a role in acquisitions, the Fed's interest-rate hikes are reducing how much buyers are offering, with "a lot of firms sitting on the sidelines or being more careful," according to Glenn Spencer, the CEO of Overland Park, Kansas-based registered investment advisory firm Prime Capital Investment Advisors. Spencer's firm has made 19 acquisitions in the past five years after receiving minority investments from a private equity firm and an individual investor, he noted in an interview.

"Our costs have gone up, so we just need to be prudent about what we're paying and what businesses we're buying. The more chunky, sizable deals move the needle more for everyone," Spencer said. "The smaller deals are going to get less attention."

The "underpinnings" of wealth management consolidation "remain strong," according to Patrick Bomhack, a lawyer who works on M&A deals in wealth management at Milwaukee-based O'Neil, Cannon, Hollman, DeJong & Laing. In an interview, he pointed out that private equity investors still see a great deal of appeal in the industry.

"The influx of private equity capital and the need to put that capital to work on strict timelines is the central driving force in the RIA M&A marketplace," Bomhack said. 

Other factors, like the divide between small and large firms, will also keep bringing parties together at the negotiating table — whether stocks are down, as in 2022, or up, as they have been in the first half of the year.

"There's a fragmented market, strong recurring revenues, sticky clients, a boom in advisor retirements and a business model that is well-suited to creating size and scale through inorganic growth," Bomhack said. "Any turmoil in the national macroeconomic environment has only a limited negative impact on the M&A marketplace for RIAs. The big players have big goals and are marching ahead because the fundamentals of this space have not changed."

So far in 2023, Wealth Enhancement has unveiled the largest number of deals, at seven, followed by the half-dozen announced by Beacon Pointe Advisors, five each by Hightower, Captrust and Savant Wealth Management and four by Cetera Financial Group and Cerity, according to Echelon. Representatives for Hightower reported that the firm has announced nine deals so far this year.

"The increase in transacted (assets under management) is encouraging given the higher cost of capital and the activity in other industries," the firm said in its latest quarterly deal report released earlier this week. "Our key takeaway for readers is that wealth management M&A remains resilient."

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Recent case studies
Acquirers tend to select income firms with an eye toward potential new services or larger footprints in a particular area. Chicago-based Hightower's latest deal investing in suburban Philadelphia-based tax and advisory firm GMS Surgent will enable the acquiring firm to launch its own tax-focused subsidiary firm. Similarly, Minneapolis-based Wealth Enhancement picked up its third location in Denver with the acquisition of Ryan Financial, which has two advisors with $200 million in client assets.

"After 23 years as a private, independent firm, the partners and advisors at Ryan Financial are eager to join forces with Wealth Enhancement Group," founder Robert Ryan said in a statement. "We are aligned with the firm's values, and this partnership will allow us to offer our clients additional services through Wealth Enhancement Group's Roundtable team of specialists."

New York-based Cerity Partners, which is majority owned by Genstar Capital and has $65 billion in client assets across 38 locations with more than 700 financial advisors, struck a deal to purchase AJ Wealth, another RIA in its home city. The incoming firm's two founders, ex-Goldman Sachs family office advisors Andrew Cooper and Justyn Volesko, will take on newly created management roles ramping up the ultrahigh net worth services at Cerity after the close of the deal. AJ Wealth has $2.37 billion in AUM, according to its latest Form ADV disclosure.

"Partnering with Cerity Partners is a natural evolution of our firm," Cooper said in a statement. "Our clients have complex financial situations and are looking for someone to oversee their entire financial picture. Our experience matched with Cerity Partners' wide range of services and investment capabilities will help make this partnership very successful for our clients and firm."