RIA Merger Market Hits 9th Year of Record Activity

The M&A tear did finally slow in Q4 2022, marking the first year-over-year quarterly decline in more than four years, according to DeVoe.

Mergers and acquisitions in the registered investment adviser space had another banner year in 2022, according to consultancy DeVoe & Company, but a slowdown in the fourth quarterhas advisers on the fence about whether 2023 can continue the streak.

DeVoe reported 264 RIA transactions in 2022, a 10% increase from 2021 and a total that smashes the 36 deals from the firm’s first report in 2013. The completed M&A deals took into account the turbulence of 2022, according to the firm: Dealmakers went for smaller acquisitions, gave smaller up-front cash payments and structured cash and equity terms to capture growth upon a market rebound.

“M&A activity has been surprisingly resilient through a challenging 2022,” David DeVoe, founder and CEO of DeVoe, said in the report released Wednesday. “But the amalgamation of pressure points ultimately fatigued many sellers, particularly ‘do it yourselfers’ who didn’t hire an investment bank. Something had to ‘give,’ and it was often their transition planning initiative.”

That “give” came from the first year-over-year quarterly decline in more than four years, according to DeVoe’s tracking. Transactions in Q4 2022 totaled 61, down 20% from the same quarter in 2021, with October the slowest month of 2022.

RIA opinions are somewhat mixed on whether the slowdown will bleed into 2023, according to DeVoe’s surveying. Forty-two percent of RIA owners and senior executives expect at least a slight increase in activity, nearly one-fourth expect M&A activity to decline in 2023, one-third expect little change.

The near-decade-long run of M&A activity among RIAs has been driven on the one hand by an aging industry looking either to sell to larger advisories, pass the baton to successors or shut their doors. With that movement has come an increase in consolidator firms seeking to boost both talent and assets under management, as well as aggregators bundling insurance, wealth planning, retirement solutions and benefits in the name of providing holistic services to employers.

Short-Term Pain

DeVoe attributed the Q4 2022 M&A slowdown to a “confluence of several factors, including rising interest rates, volatile or declining equity markets, sluggish economies, as well as buyers and sellers being more cautious.”

According to the firm, “buyers were more selective with the opportunities they pursued. Meanwhile, some sellers paused due to valuation concerns.”

Consolidator firms accounted for the biggest shares of transactions at 133, or 50% of all M&A, as tracked by DeVoe. The biggest players were Mercer Advisors (19), Wealth Enhancement Group (13) and Creative Planning (12). RIA firms were the second biggest acquirers, though generally for smaller transactions.

Private equity firms continued their interest in the space, making the most transactions among DeVoe’s “other” category. Insurance aggregators such as CAPTRUST (6) and OneDigital Investment Advisors (6) also showed up among the most active in the report.

Long-Term Gain

While a slowdown may continue in 2023, the long-term trend of RIA consolidation should continue, according to DeVoe.

“In our view, over the mid- and long-term, RIA M&A activity is likely to continue its upward arc,” the report said. “With the average age of RIA owners in their early 60s, a retirement wave is a pressure point that will methodically push more owners toward a transition. If internal succession is not planned well in advance, an external sale becomes the viable alternative.”

The Financial Regulatory Authority issued guidance on succession planning in November, 2022, in part to protect consumers from a surprising break or disruption in their wealth and financial services. But the decision to sell may be harder in 2023, with 60% of RIA owners and executives anticipating lower valuations for firms.

“As always, our advice to sellers (and buyers) is to not try to time the market,” the DeVoe report said. “Business and life decisions should take precedence over one’s hopes or the expectation that a better valuation is just a short time away.”