• Valuations. The equity value of many wealth management firms has risen significantly during the past decade, making it harder for younger members of an RIA to buy out the founders. “Founders must weigh potentially discounting the value of their equity to effectuate an internal transfer versus pursuing a sale to larger organizations, consolidators or financial sponsors,” the report said.
It pointed to Fidelity research from last year that found EBITDA multiple for deals increased 40% from five years earlier. But Piper Sandler also noted that larger firms with scale are more likely to attain premium valuations. “Even the fastest growing firms are likely to face headwinds in achieving a premium valuation if they have not achieved significant scale, as forward-looking buyers evaluate not just historical growth but [the] ability to grow in the future,” the report said.
Still, the report stated that M&A transaction activity was most active among wealth managers with less than $1 billion in assets, befitting an industry dominated by smaller, independently owned firms that’s ripe for consolidation.
• A significant pool of potential sellers. Piper Sandler estimates the potential pool of RIA acquisitions over the next five to 10 years is $2.4 trillion in assets. It noted that more than half of the 6,600-plus existing RIAs manage less than $250 million in assets, making them likely targets to be acquired or to merge with another firm of similar size.
The report said the nearly 900 RIA firms with $1 billion or more in client assets make attractive acquisition targets for companies seeking to move the needle for the size and scope of their own firms. And firms in the $1 billion-plus AUM category also appeal to financial sponsors wanting to make a platform acquisition. In addition, the $1 billion-plus RIA firms could be buyers seeking tuck-in acquisitions of smaller RIA firms.
• Increasing resource demands. Rising costs related to technology, legal and compliance burdens, cybersecurity, or other operational requirements make it more costly for smaller RIA firms to go it alone. Many such firms opt to find arrangements with other RIA firms or outside parties—in whatever form that might take—to lessen that burden.
In short, the RIA M&A market should remain vibrant for the foreseeable future. And as Piper Sandler sees it, the expected ongoing deal volumes and continuing strong interest from a large number of buyers should help foster healthy valuations for RIA businesses that "check the value boxes."