Once again, RIA mergers and acquisitions broke new records in 2022. But the year ended with a significant contraction in activity, according to the latest DeVoe & Company “RIA Deal Book,” released today.
The year limped to a close, with the fourth quarter having a particularly unremarkable showing. The fourth “quarter started with a whimper. October leaked out a single transaction in three of the four weeks—an 80% drop from a typical weekly clip,” said the DeVoe report. “The pace picked up in November and December, but remained below average. As a result, the fourth quarter was the weakest quarter since the second quarter of 2021.”
Interest rate increases, volatile equity markets and sluggish U.S. and world economies were blamed for the sudden slowdown. “Buyers and sellers alike became more cautious about partnership decisions. Buyers were more selective with the opportunities they pursued. Meanwhile, some sellers paused due to valuation concerns,” the report said.
Sixty-one transactions were made in the fourth quarter of 2022, a decline of 20% from the same quarter in 2021 and the first year-over-year quarterly decline the financial industry has seen in four years. Until the fourth quarter of 2022, M&A transactions set record high numbers consistently year over year.
The numbers for the full year look a little better. Transactions for the year totaled 264, a 10% increase over the 241 of 2021. DeVoe tracks mergers and acquisitions for firms of $100 million or more in AUM.
Consolidators, which DeVoe defines as companies whose business models are predicated on making RIA acquisitions, accounted for 133, or 50%, of all transactions in 2022. In 2017, there were only 33 such transactions, and they represented 37% of all deals. But the 2022 total was approximately the same as that for 2021.
Mercer Advisors, the Wealth Enhancement Group and Creative Planning were among the top consolidators last year.
At the same time, small and midsize firm activity made up 75% of all transactions for the year.
The number of RIA transactions—in which RIAs bought other RIAs—were 69 for the year. Although much of the activity occurred among smaller firms, mega-transactions were also recorded. For instance, Cresset Asset Management merged into Meristem Family Wealth, a $5.4 billion family office advisor, creating a multifamily office with more than $27 billion in AUM. Also, Wetherby Asset Management and Laird Norton Wealth Management merged to create a $15 billion organization.
Last year saw a shift in the types of firms making moves. Smaller firms sold in greater numbers, while larger firm sales slowed, said the DeVoe report.
Among the total transactions, DeVoe also tracked sub-acquisitions, which it defines as acquisitions made by firms that were previously acquired themselves. This category of activity has more than doubled over the last two years. In 2022, a total of 57 sub-acquisitions were signed, 50% more than in 2021.
“RIAs making sub-acquisitions are often a good fit for the growing number of sellers with less than $500 million in AUM,” the Deal Book said. “These buyers have the resources from their parent company to purchase other firms and the expertise to operate those firms successfully, whether integrated into their own operations or left to operate independently.”
Valuations for all types of businesses have peaked in the last several years, and advisory firms are no different. “Many of today’s seasoned RIA buyers—mainly private equity-backed consolidators with sophisticated management teams—have carefully designed strategies, platforms and processes that can expand the profitability and accelerate the growth of acquired firms,” DeVoe said.
However, the macro environment changed in 2022 with interest rates increasing, a weaker economy worldwide, and stock market declines.
The future may present a mixed bag of M&A activity, DeVoe said.
“The recent decline in activity may be a precursor to near-term volatility. The macroeconomic environment is likely to be volatile for some time, which will subsequently push and pull RIA M&A activity” in different directions, the Deal Book said.
RIA owners also think the future may not be as clear-cut as the last few years of seemingly predictable activity increases. RIA owners and senior executives show varying expectations.
According to DeVoe research, 42% of advisors expect an increase in M&A activity, though not a big one. One-third anticipate level activity. And one-quarter expect a decline.
“In our view, over the mid- and long term, RIA M&A activity is likely to continue its upward arc,” DeVoe said. “With the average age of RIA owners in their early 60s, a retirement wave is a pressure point that will methodically push more owners toward a transition. If internal succession is not planned well in advance, an external sale becomes the viable alternative.”
Advisory firm owners also look favorably on the advantages of scale that a merger can provide.
“Our advice to sellers and buyers is to not try to time the market. Business and life decisions should take precedence over one’s hopes or the expectation that a better valuation is just a short time away,” DeVoe said.