RIA mergers and acquisitions have fallen to their lowest level since 2021, extending the deal slowdown that has affected wealth management for the last 18 months.
According to a new report from Devoe & Company, a consulting firm that specializes in M&A and wealth management companies, 2023 is now on track for its first annual M&A decline in nearly a decade. In addition, quarterly deal volume has declined from a high of 76 deals in the fourth quarter of 2021 to 57 deals completed last quarter, although that figure comes on the heels of nine consecutive years of record deal activity.
Despite recent declines, the RIA marketplace is still extremely active compared to levels before the Covid-19 pandemic, with quarterly deal volume surpassing pre-pandemic record quarters. In 2019 and 2020, quarterly deal volume had a high of just 34 deals and 48 deals, respectively.
According to the report, macroeconomic conditions such as high inflation, high interest rates, and long-standing uncertainty in the economy and financial markets are likely compressing M&A activity. “Both buyers and sellers are a bit more timid in the current market,” wrote Devoe.
The report added that buyers appear to have become more selective, while sellers seem more reluctant. In a survey conducted by Devoe, 40 percent of buyers said that they had become more selective in the firms they’re considering for acquisition, up from 27 percent in December 2022. Additionally, 33 percent of buyers recently indicated that their pipelines were now smaller than they had been four to six months ago. In December 2022, just 7 percent said their pipelines were smaller.
“The pipelines of major acquirers are a leading indicator of transactions, so one might conclude that a further decline in activity is still to come. However, the sky isn’t falling: 54 percent of major acquirers indicated an expanding pipeline, an uptick from six months ago, when 40 percent indicated the same,” the report stated.
Despite recent declining trends and shifting perspectives, Devoe expects M&A will increase in the near future. According to the report, nearly all major acquirers were optimistic that they would either maintain (40 percent) or increase (53 percent) their number of transactions in the next six months.
Smaller RIAs are driving the sales. Over the last 18 months, smaller RIAs — $100 million to $500 million — have comprised nearly half of all sellers and have made up 57 of the 120 deals recorded in 2023.
The report cited several factors for this trend. Consolidation through M&A has been a decade-long movement that has resulted in the concentration of wealth in a smaller number of growth-oriented firms. For this reason, “smaller RIAs are likely to feel the greatest competitive pressure in the evolving marketplace and are typically selling to gain the benefits of scale,” wrote Devoe, which added that at the same time, interest in smaller RIAs from acquirers has increased as “smaller firms typically sell at lower multiples.”
In contrast, midsize firms — those with between $501 million and $1 billion in assets — represented just 13 percent of the deals completed last quarter. Firms with between $1 billion and $5 billion, meanwhile, represented 28 percent of the deals, while firms with more than $5 billion in assets represented 11 percent of the deals. The average seller size for 2023 (excluding firms with assets about $5B) was $900 million, which is slightly above the average recorded in 2022 but below the $1 billion-plus averages of 2020 and 2021. DeVoe said that they exclude sellers with over $5 billion from this calculation to eliminate the impact of outliers.
Ultimately, said Devoe, the decline in M&A this quarter is driven by “likely sellers” deciding that they don’t want to sell. “For a variety of reasons, many RIA firm leaders are concluding that it is best to wait for a better time,” said Devoe. If an RIA is looking to sell but isn’t quite ready, Devoe suggests putting in the time to improve the business, particularly by enhancing its growth trajectory or by optimizing human capital, so that it can reap better valuations when the time does come to sell.
“Growth is arguably the most sensitive factor in a valuation. For every 1 percent increase in an RIA’s sustained growth rate, its valuation can increase by 7 percent,” Devoe stated. “And just as importantly, strong growth is a key indicator of a healthy, vibrant firm.”
Firms should also look to invest in up-and-coming talent. “The future of any RIA firm is its next-gen advisors, those in line to be the future leaders,” wrote the company. Unfortunately, this is something that many firms struggle with. According to wealth and asset management research and consulting firm Cerulli Associates, close to 75 percent of rookie financial advisors — defined as those with three or fewer years in an advisory role — failed or left the industry in 2022.
“Interestingly, there is a clear connection between growth and people. A high-growth RIA typically creates better career paths, higher income for employees, and fewer administrative headaches for all,” Devoe said.
