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The M&A Dots Wealth Managers Are Failing to Connect

Nearly half of RIAs want to acquire or merge with another RIA in the next 24 months. Most are not going to do that, according to a report by Dimensional Fund Advisors.

Many independent wealth management firms want to buy or merge with another RIA in the next two years. That probably won’t happen, according to a study published this week by Dimensional Fund Advisors.

Almost half of nearly 1,000 RIAs surveyed by DFA indicated they would like to do a merger or acquisition within the next 24 months. But the same study found that more than 80% of the firms lack a defined M&A strategy, something necessary to attract sellers in a competitive market and ensure that any deal is successful.

Where there is will, there might not be a way, for a few reasons. 

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FOMO is one. The number of mergers and acquisitions involving RIAs reached a new record again in the first quarter of 2021 (76 deals). Observers also say deal volume is nearly certain to increase, as the number of RIAs continues to grow, and more institutional investors seek opportunity in funding deals. For sellers, and especially the prolific buyers, these are exciting times. “There is a little bit of fear of being left out,” Catherine Williams, head of Practice Management at DFA, told RIA Intel

But without formally considering an M&A strategy, many RIAs don’t even know if they should be a buyer or not. 

New buyers are facing a seller’s market, high valuations, and competition from an increasing number of prolific RIA acquirers flush with capital, technology, and formulaic approaches to deals. Without the formal strategy most RIAs lack, many new buyers are setting themselves up to struggle or fail. Among firms interested in making a transaction in the near future, 31% wanted to acquire a firm, 21% acquire a team, and 9% sought to merge. 

Only 7% wanted to be acquired but many more realize selling is a better path forward for their RIA, according to Williams.

“It’s such a fun, sexy topic to talk about but it’s not for everyone,” Williams said about mergers and acquisitions. “I think that we need to give ourselves permission, as firm owners. You don’t have to acquire [another RIA] to be a successful, valuable business.”

When a firm decides not to acquire another RIA, that doesn’t automatically make it a seller. Would-be sellers often solicit term sheets and find a deal will be great for the owners, then tussle with the impact on their employees and clients and decide against it. DFA found that 62% of respondents have been contacted by firms interested in doing a transaction, but only 3% of that subset moved forward with a deal. The top “deal‐breakers,” according to the study were lack of investment philosophy alignment (83%) and firm culture fit (82%).

Williams said some RIAs are worried that if they aren’t a buyer or seller, they might become (or be viewed as) a laggard. That shouldn’t be the case, she said. Regardless of an RIA’s deal plans, it should be taking steps to grow and improve (like reconsider their marketing in light of recent changes to SEC rules, or attract younger clients with changing wants and needs). 

Or work on their succession strategy. Less than half (44%) of firms have one in place, an improvement over DFA’s prior annual studies “but indicative that many firms are still grappling with developing a comprehensive plan.”

“There are headwinds coming at your business,” Williams said. “You do need to be growing to a degree just to keep up.” 

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

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