The turbulence created by interest rate increases and market declines in 2022 and early 2023 did not stop RIA M&A activity. Instead, the challenging conditions rapidly reshuffled the competitive landscape and set up an exciting market. Activity will continue for no other reason than there are growing numbers of both buyers and sellers looking to make deals, but the complexion of buyers and the motives of sellers will impact deal volumes and structure.
Buyers continue seeking deals to add talent, services and client segment depth. Sellers continue seeking partners to advance near-or-long-term succession needs and plug into vast resources to compete. Creating value through M&A has moved past proof of concept, and participation is more diverse than ever.
As the wealth management industry has matured, it has allowed a growing number of RIA firms to achieve the size and scale necessary to attract the attention of private equity asset managers and other institutional-size firms. The maturity has also proved that M&A can be strategically accretive for buyers and a “next step” for sellers at all stages. A long track record of success means we expect to see more M&A activity from larger entities who have remained on the sidelines to a large degree so far—independent broker/dealers, insurance firms, asset management platforms and multifamily offices.
Financial advisors continue to favor independent advice channels, and RIAs have benefited tremendously. A few years ago, the idea of a $100 billion RIA was almost laughable, and now there are several RIAs at or exceeding this figure. These RIAs have signaled that they aspire to be much more than a local or regional wealth manager. The top RIAs are signaling they intend to compete head-on with large financial institutions with best-in-breed independence. How will the financial institutions respond? They already have, and it includes direct investments in RIAs that expand commitment to private and institutional wealth management.
Large institutions will see a strategic benefit, but the industry must also realize that some financial market changes favor these institutions from an investment standpoint. Why? Rising interest rates could slow (not stop) firms that rely heavily on debt capital to fund acquisitions. However, rising rates positively impact large institutions with banking capabilities that can drive interest income. Rates will slow some and open the door for others.
Financial mechanics aren’t the only driver. A vertically integrated wealth management offering through a hub-and-spoke strategy, or several direct acquisitions offers a compelling retention and recruiting mechanism for large financial institutions. A direct investment strategy also allows them to compete with emerging RIA platforms.
This trend is a net positive for the RIA industry as independent businesses seek succession and additional resources. There will always be a place for truly independent shops that set their own growth cadence and have no desire to be acquired or merge with another firm, but they will have to find a unique niche and contend with shifting competitive dynamics. In fact, having unique differentiators is also important for RIAs looking to put their firms on the market. Buyers today are getting much more selective in choosing the targets they pursue, and valuation is no longer the sole consideration. They are looking for sellers to share more of the risk associated with the sale by including performance metrics and longer transition periods in contracts.
These sleeping giants could put an exclamation point on the changing competitive dynamics in the independent wealth space. “If you can’t beat them, buy them” opens the door to even more options in the RIA space and introduces new considerations for founders and operators of stand-alone RIAs. Existing RIAs will need to consider the implications of these firms entering the market and how best to remain competitive and attractive. The following five areas of focus will help prepare for the coming competitive shifts:
- Prioritize sustainable organic growth. Proactive marketing, messaging and building a sales process are no longer optional.
- Bulletproof talent retention and engagement. Career progression, development and a balanced compensation structure are required to compete.
- Invest in cohesive infrastructure. Technology and the operational process will help.
- Create a repeatable path to ownership. Ownership is a touchy subject and is required to engage talent over the long term and ensure succession doesn’t become unattainable.
- Accept the tradeoffs to create a sustainable business. M&A isn’t for everyone. Fear of missing out is real. The new environment requires conviction to ensure M&A doesn’t become an unnecessary distraction.
Remaining sustainable also creates the best premium in the external market. M&A is a necessary path for a healthy RIA ecosystem and reinforces the attractiveness of the RIA space. New entrants such as large institutions reinforce the evolution in the space and are also a reminder that owners must remain aware of the shifting competitive landscape.
Brandon Kawal is a principal with Advisor Growth Strategies and the primary author of the annual report “The RIA Deal Room.”
