As the wealth management industry evolves, mid-sized firms must actively participate in consolidation activity, transforming the space and looking for strategic opportunities to add scale and talent to ensure future success. From a seller’s standpoint, financial advisors may want to consider a mid-sized firm that has a similar service mindset, set of core values and culture that they have cultivated over the years.
Growth in RIA M&A Activity Remains Steady
According to a recent report from DeVoe & Company, the RIA M&A market has seen robust growth nearly every year since 2013. After a post-pandemic bounce, transaction volume has remained steady for the last three years. While the large RIA consolidators, who are serial buyers with business strategies focused on growing through acquisitions, used to dominate the deal flow, RIAs, regardless of size, are seeing increased M&A activity. In fact, DeVoe shows that since hitting a peak of 54% of all transactions in 2021, consolidators have steadily lost ground to acquisitive RIAs who have accelerated their activity.
Lower Cost of Capital
Even with higher interest rates over the past few years, the RIA M&A market remained strong. While the higher cost of capital impacted valuations, bringing some sky-high levels closer to earth, they didn’t dampen overall deal flow. That’s because too many other factors are in play—from changing client demographics to the wave of retiring advisors—that have added to the consolidation trend in the industry. And those factors are not going away. Add the Federal Reserve’s new easing cycle, and M&A activity could accelerate in the coming year.
Falling rates will likely increase buyer activity as the cost of acquisitions decreases, making it less expensive for buyers to take on debt. With the cost of acquisitions declining, the math improves, allowing valuations to rise again. The greatest impact of the declining cost of capital will likely be on private equity-backed consolidators. As debt service ratios improve, these enterprises will be more willing to deploy capital aggressively.
However, as valuations rise again, will financial advisors look to sell to the highest bidder? Some will, but we believe many will take a more measured approach, look at the entire picture and weigh the benefits to themselves, their staff and their loyal clients before signing on the dotted line.
Mid-Sized Firms Can Offer More Than Just A High Payout
When it’s time to monetize the business you’ve spent a lifetime building, you deserve to be handsomely rewarded. But if you are selling all or part of the equity you’ve accumulated, additional considerations need to be part of your calculation.
At the top of your list should be how your valued clients will be treated. If the buying firm is not committed to continuing the exceptional service experience and personalized support you have prided yourself on providing, you may want to look elsewhere. If you are only selling a part of your practice or staying on for a pre-determined time, you need to find a partner that offers a bespoke service environment and a culture that treats you with the respect you’ve earned.
You built an RIA because you believed the independent model was best; you took advantage of the freedom and control to run your practice as you saw fit and, as a result, sought to produce better outcomes for your clients. Selling to a large RIA enterprise or consolidator whose primary focus is acquiring as many firms as possible may not be the best move to protect your legacy.
As you step away from the industry, the right mid-sized firm, one with enough scale to compete with the larger players on price, platform and product while offering individualized high-touch service, may be a better decision.
Mid-sized firms may also be better positioned to offer you flexible terms to make the transaction more to your liking. This is especially true if you plan to stay involved and continue to grow your business after taking some of your equity off the table. Mid-sized firms have more of an incentive to work with you in a creative way that is a win-win for all involved.
So, remember, while you deserve to be rewarded for the business you’ve built, be careful about jumping at the highest offer from the biggest firm. There are nuances to consider that can make your transition more successful for all involved.
Michael Nessim is CEO, president and managing partner of Kingswood U.S., an SEC-registered RIA and a FINRA-licensed broker/dealer
