As we settle into the second quarter, it is the perfect time to assess the trends impacting the current wealth management mergers and acquisitions landscape and consider what may lie ahead.
At the beginning of 2023, many had doubts about the environment. The Federal Reserve was in the middle of an aggressive rate-hike campaign. Moreover, the markets were coming off steep losses the previous year, and many had serious questions about the economy’s health.
Given those challenges, some observers thought M&A would suffer mightily. That did not happen.
According to Fidelity, there were 227 deals last year involving RIA sellers with $100 million or more in assets under management. That represented only a 1% decline from 2022. While the annual drop-off was more significant in the data Berkshire Global Advisors tracks (which only includes RIA sellers with AUM of $250 million or more), it was a relatively strong year in terms of deal volume, with the number of transactions easily eclipsing pre-2021 levels.
Against this backdrop, let’s examine what’s influencing the market today and what to expect going forward. Here’s a look.
The market remains resilient and will continue to prosper. As noted earlier, 2023 was a good year for dealmaking despite some significant headwinds. There were a few reasons for that. First, financial advisors continue to age, and M&A is a sought-after solution to the industry’s ongoing succession problem. Second, wealthy individuals are increasingly seeking financial advice, creating more demand for broader services and making successful wealth management businesses that can capture these growth opportunities attractive to buyers. Third, running an RIA has become more expensive and requires more operational resources, meaning smaller firms see the benefits of merging with their larger peers to reduce costs and free up management’s time. If anything, we expect these dynamics to endure – or even strengthen – so the M&A market will continue to churn along at a robust pace despite macroeconomic challenges that may crop up.
Interest among private equity firms shows no signs of slowing down. Private equity’s influence on wealth management M&A activity has perhaps been the defining industry trend of the last five years, sparking a flurry of wheeling and dealing in the RIA space. Yet, the appetite has only intensified. In 2019, 39% of all RIA transactions with $100 million or more in seller AUM involved private equity-backed buyers, according to Fidelity. By last year, that percentage doubled. Meanwhile, it’s not just the number of deals that is notable. More and more private equity firms are getting involved – and thanks to wealth management’s recurring and sticky revenue stream, we expect private equity’s embrace of the industry to continue.
Aggregators will embrace intra-partnership mergers. Within the last six months, large aggregators have begun combining firms within their networks to build centralized hubs. As opposed to letting firms operate in isolation, the idea is to create the same sort of dynamic buyers hope to create when they make acquisitions in the first place: create greater operational efficiency, stronger collaboration and leverage the scale and resources of the broader organization. Typically, the largest RIAs within the network form hubs, which are organized based on many factors, including geography, culture, service approach and investment philosophy. Notably, Focus Financial has been recently pursuing this ‘intra-partnership merger’ approach. So have Corient and Osaic. With the industry trending to more integration, it’s reasonable to assume that this emerging trend will become more prevalent across the industry.
Increased focus on adding adjacent businesses. Undeniably, the business of wealth management has become more competitive over the years. Parallel to that is the fact that high-net-worth and ultra-high-net-worth clients are increasingly demanding more from their financial advisors. In response to these dual trends, buyers are seeking to add adjacent businesses to round out their service offerings. This can include everything from tax / accounting, investment consulting, OCIO and trust companies. A good example of this happening in practice was Mariner Wealth Advisors, which acquired investment consulting firms AndCo Consulting and Fourth Street Performance Partners earlier this year.
Last year, the broader M&A market was subdued, derailed by rising interest rates, inflation, geopolitical tensions and economic uncertainty. Wealth management M&A, however, defied the odds, even as the range of multiples has broadened more recently. The market has been propped up by aging advisors seeking a solution to succession challenges; increasing demand for advisory services from wealthy individuals; and resilient and growing interest among buyers (largely backed by private equity) looking to expand their financial advisor talent pool, client base, service offerings, geographical reach and/or scale.
We expect 2024 to play out in much the same way, with dealmaking remaining highly active and robust. The wealth management M&A environment is—and will remain—fundamentally healthy.
Bomy M. Hagopian, CFA, co-leads Berkshire Global Advisors’ Wealth Management practice.