Why last year's M&A drop-off may already be over

Even though wealth management M&A slowed in 2023, dealmakers expect the volume of transactions to remain strong due to the underlying factors that continue leading to acquisitions.

The number fell slightly due to larger economic drivers such as the regional banking crisis and high interest rates that raised the cost of borrowing, according to two industry trackers — those issued earlier this month by wealth and asset management M&A investment bank Echelon Partners and registered investment advisory firm strategy consultancy DeVoe & Company.

Still, the industry is going through only the "second inning of a long-term consolidation," said Rick Buoncore, the managing partner of MAI Capital Management, a Cleveland-based RIA. 

The elevated age of the tens of thousands of advisors expected to need succession plans over the next decade means "retirement's going to be an issue" leading to deals, and a continuing flow of wirehouse advisors will realize that "the independent space gives them the best platform to truly serve their client," Buoncore said in an interview. "If you look at the landscape, there are actually more RIAs today than there were when the consolidation started."

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Current figures

Overall industry M&A volume slipped 6% year over year to 321 transactions in 2023 — which represents the second highest amount ever following the 340 in the prior year, Echelon noted in its deal report.

"This activity was in the face of high borrowing costs as the federal funds rate surged to more than 20x March 2022 levels, peaking at 5.50% in July of 2023," the report said. "The collapse of Silicon Valley Bank and the regional banking crisis that followed contributed to an even more stringent financing environment, fostering a risk-off attitude across markets. Wealth management M&A persisted and remained a bright spot in the general M&A market, underscoring the strong fundamentals of the industry and steadfast commitment of buyers to consolidate the highly fragmented industry."

In terms of assets under management, the five largest deals announced last year infused private equity capital and other investments into Captrust, Cetera Financial Group, Focus Financial Partners, CI Private Wealth (which is now called Corient) and Lincoln Financial Group's wealth management business. With 16 transactions unveiled in 2023, Wealth Enhancement Group easily outpaced any other firms, followed by Mercer Advisors (11), Captrust (9), Savant Wealth Management (9) and Creative Planning (8).

Among RIA deals specifically, the 5% dip from 2022 to 251 transactions came after nine straight years of record M&A, DeVoe's report noted.

"The broader context of rising inflation, global economic challenges and the outbreak of multiple wars dampened M&A activity," the report said. "But the main culprits were high interest rates, which weighed on buyers, increased their cost of capital and negatively affected their debt ratios. Other factors contributing to the slowdown included extended due-diligence processes, evolving deal structures and a greater emphasis on the true value of a buyer's equity. Sellers continued to express interest in merging into larger firms for succession purposes, to monetize their hard work and/or to gain the benefits of scale. But perhaps due to the perception of lower valuations or the optimism that 'later is better,' sellers made a minor retreat."

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The outlook and a case in point

Despite the drop-off for the year, the number of transactions in the fourth quarter surpassed that of the same period in 2022, according to both reports. The climbing quarterly figures suggest volume might regain its record-breaking level of previous years in 2024. 

The reasons that "activity is heating up" to begin the year include the fact that "the bond market still isn't back to where it was" before its slump in recent years, an upcoming election that could nudge sellers into deals while "they know what the capital gains rate is now" and expected cuts to interest rates by the Fed this year, Buoncore said.

His firm offers an example for the bullish outlook. Buoncore purchased MAI in 2007 from the family of founder Mark McCormack, who had started the RIA as Investment Advisors International in 1973 and built it into a firm with $900 million in client assets. McCormack is "widely credited with inventing the field of sports marketing" as the founder of International Management Group, according to the University of Massachusetts Amherst Isenberg School of Business. His 1958 handshake with golfing legend Arnold Palmer created the sports and entertainment agency empire known today as IMG.

In a new era of expansion under Buoncore, the firm grew to more than $4 billion in client assets by 2017, when financial services holding company Wealth Partners Capital Group purchased a minority stake. Private equity-backed Galway Insurance Holdings, a financial services distribution company that also owns EPIC Insurance Brokers & Consultants, acquired a majority of MAI four years later. MAI had reached about $12 billion in client assets by then, and it has completed 35 acquisitions under the two current backers, Buoncore noted. The firm had $18.8 billion in client assets by the end of last year, with about 120 financial advisors and more than 400 total employees working out of more than 20 offices.

Financial advisors considering a sale should first ask themselves whether clients will be "in a better position than they would have" otherwise, followed by the same question about their employees and their families, according to Buoncore, who recommended not going through with it "if you can't answer positively to all three of those." In 2024, the firm is looking for more new geographic locations, investment specialties and service capabilities to add in deals, he noted.

"Our niche is we like to find firms that are at their inflection point of growth," Buoncore said. "They tend to be below $1 billion in size. At that point they haven't really made that big-dollar investment to get to the next level yet."