He pointed to First Republic Bank’s purchase of Constellation Wealth Advisors last summer, which was its first RIA acquisition since it bought Luminous Capital in 2012.
“We might be seeing an inflection point where the banks again become an active acquirer in the space,” DeVoe says.
In a report, DeVoe & Company notes that last year’s robust RIA M&A activity atypically came during a period of significant volatility in the financial markets. In most cases, market tumult puts M&A talks on the back burner as advisors devote more energy to monitoring the markets and calming nervous clients. In addition, falling asset prices compress RIA valuations and make them less attractive to potential buyers.
But going forward, the industry’s age demographics should bolster RIA M&A activity as more advisors exit the profession. But first, more advisors need to create formal succession plans to grease the skids.
“A double-edge sword in this industry is that independence is a winning model,” DeVoe says. “As RIAs grow at a steady or even aggressive rate their valuations are increasing each year, but that means that every year delayed putting in place a succession plan makes it that much harder for the next generation to buy in.
“One of the reasons why we encourage advisors to do a succession plan sooner than later isn’t to force them into retirement or accelerate that retirement, but instead to get equity in the hands of those future leaders of the firm because they’ll benefit from a cash distribution and potentially be in a position to buy out the entire firm,” he adds.
Regarding valuations, DeVoe says that after steadily increasing for several years, valuations have remained steady during the past year.