The Changing Landscape of RIA M&A in 2023

According to DeVoe and Company, a prominent advisor consultancy and investment bank, the registered investment advisory (RIA) industry may experience a decline in mergers and acquisitions (M&A) for the first time in at least nine years. In their quarterly report for the third quarter of 2023, DeVoe highlights a noticeable slowdown in deal activity, leading them to conclude that the possibility of a down year is becoming more certain.

Sluggish Third Quarter

In the report, DeVoe notes that RIA M&A started the third quarter on a positive note, with activity in July and August surpassing last year’s pace. However, this momentum abruptly halted, resulting in a decrease in deal volume. September saw a total of 15 transactions, down from 22 in the previous year, ultimately bringing the total number of deals in the third quarter to 65, marking a 4% decrease from 2022’s figure of 68.

A Year of Struggling Performance

Throughout 2023, each quarter has fallen short when compared to the same period in the previous year. The cumulative effect is evident, with only 185 transactions announced so far, compared to the 203 deals announced during the first three quarters of 2022. DeVoe acknowledges that bridging this gap in the final quarter will be a daunting challenge.

Factors Influencing Deal Activity

Despite the decline in M&A deals this year, DeVoe emphasizes that the fundamentals driving consolidation in the industry are still intact. The aging demographics of firm founders and the advantages of operating a larger-scale enterprise continue to spur interest in mergers and acquisitions. Nonetheless, these factors have encountered unfavorable macroconditions that have dampened deal activity. High interest rates, economic uncertainty, and market volatility have all contributed to the current landscape.

Looking Ahead to 2024 and Beyond

David DeVoe, the founder and CEO of the consultancy, remains optimistic about the future prospects of the RIA industry. He predicts that as some of the challenges subside, RIAs will be well-positioned to increase acquisitions of smaller firms. In fact, DeVoe anticipates that 2024 will likely mark a return to an all-time high in M&A deals. Over the next five years, he expects RIA M&A to continue growing due to the demographic shifts among RIA owners and the increasing focus on scalability.

While the current year may present some obstacles, it is important to recognize that the landscape of RIA M&A remains resilient. Despite a potential decline in activity for 2023, the fundamental drivers, coupled with a promising outlook for the future, offer a glimmer of hope for continued expansion and growth in the industry.

Succession Planning: The Future of RIA Ownership

Succession planning is crucial for the long-term stability and success of Registered Investment Advisors (RIAs). A recent survey conducted by DeVoe reveals some concerning trends within the industry. According to the survey, fewer than 20% of advisors believe that the younger talent within their firms will be able to afford buying out the founders. Consequently, many RIA owners are considering the alternative option of selling their firms.

DeVoe’s research also highlights another significant issue: two-thirds of RIAs do not believe that their next generation of leaders is ready to take over the practice in the event of a transition today. This lack of preparation, coupled with a lack of funding for younger advisors, forces many RIA owners to explore external sales because they feel they have no other choice.

The good news for those considering a sale is that the market is currently favorable for large firms. According to DeVoe, sales of firms with $1 billion or more in assets accounted for 37% of all transactions so far in 2023, up from 27% in 2022. In 2021, these sales represented a whopping 41% of all deals.

While the role of consolidators, or aggregators, in mergers and acquisitions (M&A) remains significant, their share of overall acquisitions has been declining. In 2021, consolidators accounted for 54% of all transactions; however, this number has dropped to 44% in 2023.

Some notable deals have taken place in recent months. Creative Planning made headlines with its acquisition of the $29.4 billion Personal Financial Management business from Goldman Sachs. This business was originally built on the foundation of United Capital, an independent RIA acquired by Goldman Sachs in 2019. Additionally, Cetera’s acquisition of Avantax, which boasted $83.8 billion in assets under administration, made waves in the industry.

According to DeVoe’s tally, Wealth Enhancement Group leads the pack with nine acquisitions in 2023. Cerity Partners, Merit Financial Advisors, and Mercer Advisors are close behind with seven successful transactions each. Captrust has completed six deals, while Beacon Pointe Advisors and Hightower Advisors have five deals each to their name.

As the future of RIA ownership hangs in the balance, these trends in succession planning and firm sales indicate the need for careful consideration and strategic decision-making within the industry.

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