7 RIA M&A trends from Advisor Growth Strategies report

7 insider RIA M&A trends, from mini-mega to equity-culture revolution

March 27, 2024 4:34 PM

Registered investment advisory firms should learn some new terms and M&A dynamics that reflect a much different market from only a few years ago, according to a new study.

The concepts include "mini-mega merger," an "equity-culture revolution" and the "race to institutionalize," management consulting and transaction advisory firm Advisor Growth Strategies said earlier this month in its annual RIA M&A report about the key themes shaping negotiations and deals. The below slideshow highlights some of the most important findings.

Unlike other wealth management M&A studies that primarily focus on transaction volume (which dropped off slightly last year with brighter prospects for a bigger flow in 2024), the report homes in on RIA valuations, what size firms are the most popular to acquire, and increasingly important deal factors that may get lost in the discussion. As the largest RIAs reach into the hundreds of billions of dollars in assets under management, they're trying to add more services and grow even bigger, said Advisor Growth Principal Brandon Kawal.

"We just didn't have independent RIAs even five years ago that were nearly this size and growing at this rate either organically or inorganically," Kawal said in an interview. "It's a national and, at some point, probably international race to go really deep into markets."

For the sixth year, the report drew a sponsor in BlackRock, which carries cachet with financial advisors as the world's largest asset manager. (Fidelity Investments' monthly wealth management M&A reports also highlight how deals have captured industry giants' attention.)

"While not all advisors choose to be buyers or sellers, all advisors carry the responsibility to their clients, team members and themselves to consider their options or develop their own perspective on organic growth," Liz Koehler, the head of BlackRock's U.S. wealth advisor engagement team, wrote in a message included in the report.

And one of the main lessons to glean from Advisor Growth's analysis adds to the business reasons for investing in the next generation of advisors, which is something that many of the biggest dealmakers are already doing. For example, Plymouth, Minnesota-based Wealth Enhancement Group has developed succession planning assistance, ramped up its advisor recruiting pipeline and bulked up training through the "Wealth Enhancement Group University" program, according to Kris Carroll, a managing director for the firm's Carolinas region.

"We're really looking at multiple paths to address what we think of as this shortage of next-generation talent," Carroll said in an interview.

For more on the new trends and terminology driving deals this year, scroll down the slideshow. To see a roundup of five important deals shaping the industry, click here. And to get a look at the biggest transactions last year involving independent brokerages, follow this link.

Note: All of the below data and insights come from Advisor Growth Strategies' 2024 version of "The RIA Deal Room" report, which is entitled "Life After the Gold Rush." Find Financial Planning's coverage of last year's edition at this link.

Equity stakes rise, share of cash drops in recent dealmaking

"Deal-structuring has shifted in the aggregate to focus more on partnership mentalities — meaningful cash combined with sharing risk and upside through equity consideration," according to the report. "The topic of next-generation incentives in a transaction serves as a warning to RIAs that fail to consider long-term incentives. Plan now or pay later."

Deal multiples declined last year

For the first time in the six years that Advisor Growth has compiled the report, the ratio of an RIA's earnings before interest, taxes, depreciation and amortization to the value of a deal declined from the prior 12 months in 2023. However, the drop to 9.9x from 10x was only "marginal and represented a flat result that reflected transaction volume in 2023," the report said.

An RIA size that’s a ‘new competitive battleground’

Firms with between $200 million and $500 million in AUM have turned into "a new competitive battleground" for buyers "focused on satisfying demand without running afoul of more expensive capital markets," according to the report. Average-adjusted EBITDA multiples for firms of those sizes jumped by 40% between 2015 and 2022, and RIAs of that size with a focus on financial planning are now "the most popular acquisition targets" in the industry, it said.

Word of the year potential

This year "could be the year of the mini-mega merger as the new middle is redefined to include firms with greater than $10 billion in AUM," according to the report. With 16 RIAs that had more than $30 billion at the end of 2022 and at least 50 above $10 billion entering last year, those dynamics display why "the stage is set for some possibilities that were not contemplated as recently as three years ago," it said.

High-stakes equity discussions

An "equity-culture revolution" in the industry "isn't discussed enough," according to the report, which said that ownership stakes flowing to executive management, advisors and "other key personnel" have changed deal negotiations around stock in the buyer's firm from one of "risk mitigation to value creation." That means that sellers could be looking at longer spans of seven to 12 years rather than a quick exit and fielding offers of partnerships that phase in with "multiple bites of the apple" over time, it said.

"RIAs will be forced into a framework of creating an equity culture or joining one through M&A," according to the report. "Likewise, the successful buyers moving forward must have an answer for equitizing the next generation or risk perpetuating the breakaway or carveout movement mentioned above."

RIAs are racing to become ‘institutions’ in 2024

Rather than posing "the possibility of an often-discussed mega-merger," the "target of a transformational industry transaction will likely be between an established platform and a new middle-market firm as the race to institutionalize has redefined large RIAs," the report said. Last year marked "an inflection point for RIA M&A that saw the shift from a gold rush mentality to an institutional arms race."

The massive size and growing number of services in areas like tax, insurance and other financial fields reflect how the largest RIA acquirers are seeking out "two birds, one stone" deals that "add depth to functional expertise" and "also come with a target-rich lead generation opportunity," according to the report.