RIAs, wealth managers riding the M&A wave

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Consolidation isn’t just happening in the institutional asset management world, as RIAs and wealth managers saw a record 230 transactions in 2021, according to a report from San Francisco-based wealth management consultant and investment bank DeVoe & Co.

That number dwarfed the 159 transactions in 2020, and the outlook for 2022 suggests that M&A activity is likely to remain elevated. RIAs that manage defined contribution retirement plans are among the targets.

According to the report, the number of serial acquirers looking for RIA/wealth management clients has grown from a few firms to more than a dozen. Serial acquirers have become very efficient at onboarding targets, the report said, as six firms — Beacon Pointe Advisors, CI Financial, Focus Financial Partners, Mariner Wealth Advisors, Mercer Advisors, and Wealth Enhancement Group — did 10 or more transactions in 2021 alone. Other larger RIAs are also looking for smaller targets to add scale. Ninety percent of firms with more than $3 billion in assets said they plan to make a purchase in the next two years, according to the report.

“The No. 1 reason people are doing deals is for scale,” says David DeVoe, Berkeley, Calif.-based founder and CEO of DeVoe & Co. He noted that selling for scale is happening across the board from small to large firms.

M&A is gaining traction with both would-be buyers and sellers. Buyers can increase assets under management and bolt-on investment strategies that fill gaps in a fund lineup. Sellers typically join large firms that have better marketing and technology capabilities, making it easier to scale their businesses, the report said.

Tentpole adviser platforms like Santa Clara, Calif.-based Edelman Financial Engines, which have a number of offices nationwide operating under the same banner, have invested millions of dollars in online marketing and customer engagement, making them an attractive platform for firms that lack those capabilities.

“Middle- and back-office support are other big drivers of the conversation around scale,” said Barnaby Audsley, Los Angeles-based vice president in investment banking at wealth management consultant Echelon Partners. “If you got into this business because you like working with clients, being able to have the operational and technical support that frees you up to focus on that can be a compelling reason for a sale if you find the right firm to partner with.”

Large serial acquirers aren’t the only ones driving wealth management M&A. Based on deal data collected by Echelon Partners, they anticipate that over the next 12-24 months a significant number of transactions will be driven by private equity managers.

“Private equity is looking for either platform acquisitions where they can create a new portfolio company or they are doing tuck-in (consolidation) deals. We are seeing a lot of activity for both options,” Mr. Audsley said. He added that as platform companies mature, they may go on to make additional acquisitions of RIAs/wealth managers, which will elongate the current cycle.

While deal activity is likely to remain high, would-be sellers will still have to find ways to stand out. Mr. DeVoe notes that valuations are high and buyers want to make sure they aren’t going to end up on the wrong side of a deal.

“Firms have to be really conscious about how they are positioning themselves in the market,” he said. “Taking a call and sharing details that you can’t fully support is a good way to tarnish your credibility. We have had firms tell us that they have strong organic growth but once you compare them to the market it’s actually much lower; those are the surprises no one wants in a deal.”

Customer expectations are increasing, too, fueling the desire to add more capabilities through deals. The Devoe & Co. report notes that many clients prefer to have wealth management, tax and estate planning, as well as investment strategy from the same adviser. Firms that have focused on a single area are under pressure to offer a more comprehensive suite of services. It can be difficult to build those capabilities organically, which could lead to continued transactions over time as firms opt to acquire those capabilities rather than build them.

“The industry is now being shaped by ‘meta-RIAs,’ who provide a broader set of services, run more efficiently and arguably might even serve clients better than a typical RIA,” Mr. DeVoe said.

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