At the beginning of 2023, many had doubts about the mergers and acquisition environment in the wealth management industry. 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 acquisition activity would greatly suffer. But that didn’t happen. Indeed, even as the broader M&A market was subdued last year, derailed by rising interest rates, inflation, geopolitical tensions and economic uncertainty, wealth management M&A defied the trends.
According to Fidelity, there were 227 deals last year involving RIA sellers with $100 million or more in assets under management. That represented a decline of only 1% from 2022. While the annual drop-off was more significant in the data tracked by Berkshire Global Advisors (which includes only RIA sellers with assets under management 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.
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. Let’s look deeper at these trends.
The M&A market continues to flourish. Part of the reason for this is that financial advisors continue to age, and M&A is an obvious solution to the industry’s ongoing succession problem. Second, wealthy individuals are increasingly seeking financial advice, which is creating more demand for broader services; those successful wealth management businesses capturing this growth have become attractive to buyers.
Third, it’s become more expensive for the owners of RIAs to run them, and they need 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 become even starker) and that the M&A market will accordingly churn along at a robust pace despite the macroeconomic challenges that would otherwise impede it.
Interest among private equity firms shows no signs of slowing down. Private equity has sparked a flurry of wheeling and dealing in the RIA space, and its influence on wealth management M&A activity has perhaps been the defining industry trend of the last five years. In 2019, 39% of all RIA transactions targeting firms with $100 million or more in AUM involved private equity-backed buyers, according to Fidelity. By last year, that percentage had 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 combine the firms they’ve bought. Within the last six months, large aggregators have begun combining firms within their networks to build centralized hubs. Rather than let firms operate in isolation, they’d prefer to create the same sort of dynamic buyers hope to create when they make acquisitions in the first place: by creating greater operational efficiency, taking advantage of scale and forging stronger collaboration across the resources of the broader organization. Typically, the largest RIAs within the network form hubs, which are organized according to factors such as geography, culture, service approach and investment philosophy. Focus Financial in particular has been recently pursuing this “intra-partnership merger” approach, as have Corient (the former CI Financial) and Osaic (the former Advisor Group). With the industry trending to more integration, it’s reasonable to assume that this emerging trend will become more prevalent across the industry.
Buyers will be adding adjacent businesses via acquisitions. Undeniably, the business of wealth management has become more competitive over the years. At the same time, wealthy and ultra-wealthy clients are increasingly demanding more from their financial advisors. In response to these trends, buyers are seeking to add adjacent businesses to round out their service offerings. This can include everything from tax and accounting, investment consulting, outsourced chief investment officer services and trust companies. For example, Mariner Wealth Advisors acquired and merged investment consulting firms AndCo Consulting and Fourth Street Performance Partners earlier this year.
As the major trends continue, 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.