Let’s Make a Deal
The combination of strong demand, access to financing, rising valuations, and shifting seller preferences toward larger acquirers with scalability has fueled M&A activity in the RIA and wealth management sectors. As the industry continues to evolve and consolidate, transactions are expected to remain a prominent feature of the landscape.
The average RIA/recurring revenue multiple climbed 7.9% to 3.02, according to Succession Resource Group, Inc., a consulting firm for financial advisors, highlighting a resilient and sustained M&A market. The company reported on 188 transactions representing more than $25 billion in assets under management
Sustainable growth was an essential component of value, with larger companies displaying more consistent growth and profitability, allowing them to command higher multiples.
Meanwhile, advisors with sell-side support in a competitive bidding scenario received a 10.5% higher purchase price and 27.9% larger down payments than those selling off-market to a peer, according to the firm’s findings.
The trend of private equity-backed wealth managers acquiring other firms remains robust as well and is contributing to increased valuations due to the perception they are paying above-average values.
However, most advisors lack the size and scale to be viable candidates, and private equity has not historically overpaid for businesses; instead, they use inventive deal structures that include equity in the acquirer and contingent financing based on high growth projections, explained Succession Resource Group.
“The pace of deals isn’t likely to slow anytime soon unless there is a major market correction or regulatory change, which will slow the M&A market temporarily, then lead to a flurry of deal activity, similar to what I saw in 2008/2009,” said. David Grau Jr., president of Succession Resource Group.
Meanwhile, DeVoe & Company, a consulting firm specializing in M&A and wealth management companies, discovered that dealmaking increased by 20% in the first two months of 2024 compared to the same period in 2023, indicating a favorable trend for the wealth management industry.
The first quarter is one of the weakest in deal volume due to the seasonality of dealmaking, noted Devoe. However, in the first two months of the year, 49 transactions were announced, compared with 41 transactions during the same period last year.
“RIA activity has been accelerating over the last five months,” David DeVoe, founder and CEO of DeVoe & Company, said. “Sellers are returning to the market, as a growing number pursue external sales to solve for their succession plans, while others continue to seek the benefits of scale.”
The company recently released its 2023 RIA M&A outlook, which revealed that just roughly a fifth of RIAs will be able to sell internally due to their rising value. Only 18% of RIAs feel their next generation of internal leaders has the financial resources to buy out the owners; a drop from 29% and 38% in 2022 and 2021, respectively.
The rest will have to search externally, and they must do it quickly to address the impending wave of retirements: 109,093 advisors plan to retire over the next decade, accounting for 37.5% of total industry personnel and 41.5% of total industry assets, according to Cerulli Associates.
“Advisors have been coming to terms with their lack of true organic growth,” wrote DeVoe & Company. “To paraphrase Warren Buffett, as the tide of market returns went out over the last two years, most advisors realized how threadbare their marketing strategy had become.”
In recent years, many RIAs have struggled with organic growth. According to Fidelity’s 2023 RIA benchmarking study, organic asset growth for wealth management firms declined to less than 4% in 2022, down from 8.2% in 2021. Many RIAs address this by expanding inorganically through acquisitions. According to the report, 65% of RIAs want to buy a firm over the next two years, representing an 11% rise over 2022 and the highest level in four years.
With M&A activity strong in the wealth management space, a few notable deals in recent months are worth highlighting. Late last week, Arax Investment Partners, a wealth management platform backed by private investment firm RedBird Capital Partners, announced the acquisition of U.S. Capital Wealth Advisors, a hybrid wealth management firm managing approximately $9 billion in total assets.
Earlier in the month, RIA powerhouse Creative Planning acquired ML&R Wealth Management, a $2.2 billion TX-based advisory firm, while another wealth management behemoth, Wealth Enhancement Group, announced the acquisition of Piermont Wealth Management Inc., an independent RIA with offices in Boca Raton, FL and Melville, NY that manages over $226 million in client assets.
