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The Pandemic’s Permanent Mark on Wealth Management M&A

Buying and selling advisory businesses will never be the same, according to a new report.

After the Covid-19 pandemic cooled wealth management merger and acquisition activity last year, deal volume bounced back and reached record levels. But even as the U.S. slowly normalizes, changes to wealth management M&A will remain, a new report says.

Political unrest, uncertainty about tax changes, and management fatigue all contributed to a record number of transactions but “the shift to virtual also enabled more efficient activity and appears here to stay,” according to the latest report by Advisor Growth Strategies, a consulting firm to wealth managers.

Social distancing and closed offices began as a barrier and ultimately led to a positive that many RIAs intend to keep. Experienced RIA buyers disproportionately benefited as the industry shifted to virtual mergers and acquisitions. Those companies could point to their many previous successful transactions and had the resources to quickly develop virtual processes and tools. 

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From 2016-2020, more than 40 firms (excluding their sub-acquirers) completed multiple transactions, and 14 completed multiple acquisitions in 2020 alone.

There’s little point in spending the time and money to travel and meet potential sellers until virtual interaction has vetted them as well as it can. “The pandemic did not necessarily negate the value of in-person interactions. Most dealmakers acknowledge the need for face-to-face meetings or ‘boots on the ground’ to get deals done,” according to AGS. 

Bob Oros, the CEO of Hightower, a Chicago-based RIA managing more than $80 billion, sparingly met only the largest potential sellers last year. In October, he expected the deal process to be both virtual and in-person going forward, at least through the pandemic. 

The new hybrid process will also change deals two ways. Without having to travel as much, and after eliminating inefficiencies, deal timelines have accelerated. There is a new blueprint for negotiation and integration, too, according to AGS.

Demand Outpacing Supply

Both the number of sellers and buyers coming to market continues to increase, driving up deal volume. There were 76 deals in the first quarter of 2021, seven more than the previous record set in the fourth quarter last year, according to Echelon Partners, a boutique investment bank that publishes the industry’s most inclusive M&A report.

Still, more institutional investors, such as private equity firms, want to invest in RIAs (often to help fund the acquisitions of others). “Dealmakers continue to reference outside money chasing large and mature RIA platforms as a driving force of activity,” AGS said.

The imbalance drove demand for quality sellers and resulted in a media valuation of eight times EBITDA, a 21% increase in their median valuations in 2020 compared to the previous year, the report said.“The acquisition market is getting crowded, and we are likely to see more qualified buyers in the future. This unique pipeline supported the increasing demand in RIA M&A in 2020.” 

Someday, the supply and demand balance might shift as the advisor workforce ages. But deal readiness is still low; 53% of 102 RIAs surveyed by AGS said they were unprepared for either a merger or acquisition. Half of the participants were RIAs managing $1 billion or more. 

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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