6 key trends for RIAs as mergers advance at torrid pace

March 28, 2022 9:14 PM

Wall Street’s deal-making frenzy for independent financial advisory firms is starting to look a bit different. With 2021 marking the eighth consecutive record-making year of acquisitions, several new trends are emerging. Here’s what registered independent advisory practices, or RIAs, should be thinking about, according to a new report by Advisor Growth Strategies, a management consulting and transaction advisory firm for financial advisory firms that’s based in Phoenix, Arizona.

Future giants

Just 7% of RIAs control nearly 70% of the industry’s total assets under management. With nearly 14,000 SEC-registered investment advisors managing $110 trillion for nearly 61 million clients, according to the Investment Adviser Association, a trade group, that means just a few firms dominate the industry and investors’ retirement savings. At the end of 2020, more than 20 RIAs and RIA platforms managed more than $20 billion in client assets, and several are now approaching or exceeding $50 billion.

“The meaning of ‘big’ was redefined as scaled platforms eclipsed $20 billion, $30 billion and even $50B billion” in client assets, the report said, adding that the industry “is in a growth cycle and has space for multiple “winners.” Think that’s a sign of survival of the biggest? The largest players now are only going to get larger. At least 10 RIAs will each manage $100 billion in client assets within the next five years, the report said.

David DeVoe, the founder of DeVoe & Company, a consulting firm and investment bank in San Francisco, California, for wealth management companies, said that “We’re continuing to experience a domino effect. Mega firms started selling, then large firms, then mid-size, now small. Firms now contemplating a sale are influenced by proof-of-concept.”

It’s not consolidation, it’s concentration

Despite the conventional wisdom that the industry is compacting into fewer players, the number of RIAs keeps increasing each year. According to data from Cerulli & Associates that was cited by the report, more than 500 new firms emerged in 2020, the most recent data available.

“The real trend is AUM (assets under management) concentration, despite the increase in the number of RIAs,” the report said. “The headlines were buzzing as large RIA platforms such as Mariner Wealth Advisors, Savant Wealth Management, Carson Group and Beacon Pointe completed transactions with top-tier institutional investors and effectively recast the industry landscape for RIA valuation.”

With nearly $3 trillion in advisor-managed assets on track to change hands over the next 10 years due to retirements, succession and growth-related challenges, it’s those largest RIAs that have “the most favorable investment characteristics for professional investors and set the pace for the rest of the market,” the report said.

Private equity supersizes everything

DeVoe & Company tallied 242 transactions with RIAs in 2021 — a 52% increase on the 159 transactions in 2021. More than half of buyers are private equity backed “consolidator” RIAs. Wealth Enhancement Group, with 17 deals, Mercer Advisors, with 16 deals, and CI Financial, with 13 deals, led the pack last year. Fewer than one in four buyers are individual advisory firms.

In other words, private equity is increasingly calling the shots. “Outside capital will increase professional management and accelerate the appetite for M&A, assuming opportunities to deploy capital effectively,” the Advisor Growth Strategies study said. Furthermore, it added that the merger landscape “will experience more significant variation in transaction models and strategies as more outside capital investment occurs.”

That in turn creates a new problem for RIAs: how to stand out in a crowded field.

What’s your brand?

The scrum of private equity firms and RIAs works both ways, according to the report.

“Buyers faced a saturated market that made it difficult to stand out. And for perhaps the first time, sellers entered a market with ample supply that offered no guarantees.”
“The 2021 RIA M&A landscape saw buyers face pressure to pick a clear identity in a crowded marketplace, while sellers were forced to demonstrate a compelling story or risk getting lost in the shuffle.
”Sellers were forced to clarify their story and answer the question, “What makes you different?” Strong history matters, but buyers want to understand how a seller can help meet their future objectives. A straightforward value-added story of organic growth, engaged talent and unique capabilities or channel access will be required to achieve a premium valuation as more sellers approach the market.
“Demand will likely continue to outpace supply, but it will take more to stand out in a crowded seller market.”
“Achieving a premium valuation in 2022 will require a compelling story and demonstrated track record.”

Taming of the bubble?

For several years, independent firms have commanded ever-higher prices as measured as earnings before interest, taxes, depreciation and amortization, a common measure of profitability and worth. RIAs have high profitability margins and opportunities for growth as aging Boomers transfer more than $68 trillion in wealth to younger generations over the next 25 years, according to Cerulli & Associates. Some industry observers wonder if there’s a bubble for the most attractive wealth management firms.

Last year, the median-adjusted EBITDA multiple grew 12% compared to 2020. The rate represented a “deceleration” for the third consecutive year, the Advisor Growth Strategies report said. “The deceleration in the median-adjusted EBITDA multiple suggests the market may soon reach an equilibrium.

Platforms rule

“Platforms” are like a chassis to which independent advisors bolt on their practices. They’re winning, according to the report.

“The difference between RIA platforms and practices became more acute as high-end RIAs such as Savant Wealth Management, Carson Group, Mariner Wealth Advisors and Beacon Pointe secured investments from top institutional investors and set the tone for a thriving M&A market,” the report said. Last year, it added, “the top RIA platforms set the pace for all others.”