The merger and acquisition activity of financial advisory firms has soared in recent years, but the numbers still have not reached their peak, according to DeVoe & Company.
For similar reasons, the valuations of firms have climbed to new heights with no limits in sight, the firm said in its annual RIA M&A report, released today. The report is based on the opinions of 131 firm leaders representing the gamut of firm sizes.
“Despite eight consecutive record years of M&A activity, advisors believe that we are just getting started,” DeVoe & Company, a consulting firm and investment bank, said in the report. “Nearly two-thirds of RIAs responding to the survey believe that RIA M&A will increase during the next year. The recent 30%-plus year-over-year increases in M&A volume are seemingly driving expectations of a ‘new normal’ trajectory, as opposed to anticipating fatigue and a slowdown.”
“The wealth and investment management industries are highly dynamic and evolving at a fast pace,” the report added.
Although growth will continue, it will not proceed at the pace seen in 2021, David DeVoe, founder and CEO of DeVoe & Company, said in an interview. The 50% increase seen in 2021 is not sustainable, even though the number of M&A transactions will continue to grow.
"We should be seeing 250 to 300 transactions a year, so there is still some catching up to do, but a 50% increase for several years in a row would be unhealthy for the industry. These deals take time, and that amount of an increase" would outstrip the industry's ability to absorb it, he added..
According to the survey, 63% of respondents indicated activity would rise somewhat or rise considerably in 2022. The reasons for the continued unprecedented activity include the high valuations of firms, the aging of firm founders, and the proliferation of serial acquirers.
“There is a sense of ‘fear of missing out’ that is drawing advisors into the discussions to at least learn about their options,” the firm said. Only 34% of advisors think M&A activity will remain steady, and a minority of only 4% think activity will decline this year.
The newest responses are a mirror image of the responses received two years ago at the beginning of the pandemic. That survey, fielded in the early days of Covid-19, showed 75% of advisors expected a decline in M&A, and nobody projected an increase. As the industry has seen, those predictions were far off the mark. Advisors at that time “seemingly assumed the pandemic would quell these strategic decisions. In retrospect, Covid likely drove M&A activity, as advisors reflected on their goals, mortality and lack of succession plans, and in many cases, the outcome was the decision to sell externally,” the report said.
2021 was the eighth consecutive year of record activity, which should continue to increase for the next five to seven years, DeVoe& Company said. And the larger the firm, “the greater the appetite to acquire another firm," the report said. "A shockingly high 90% of all firms with more than $3 billion in AUM said they are looking at making acquisitions during the next two years."