SAN DIEGO — What’s driving the furious pace of RIA mergers and acquisitions that’s expected to result in a record number of deals by the end of the year?
M&A professionals discussed factors that are fueling one of the industry’s biggest stories of 2019 at a roundtable panel at Schwab’s annual Impact conference:
Scale: “Succession planning has traditionally been the main force behind M&A, but scale is now the primary driver,” according to David DeVoe, managing partner of DeVoe & Co., a San Francisco-based consultancy.
DeVoe pointed to recent deals in which sellers had billion-dollar-plus AUMs as “great examples” of why scale is driving dealmaking, including HighTower’s purchase of Schultz Collins in San Francisco, Wealth Enhancement Group’s acquisition of RCL Advisors in New York and AEPG Wealth Strategies in New Jersey as well as private equity firm Lovell Minnick taking a stake in New Jersey-based Pathstone.
All the acquired RIAs, felt they needed additional resources to compete in an increasingly competitive market despite their large size, DeVoe said.
“We’re seeing more firms with over $1 billion in assets come to market,” noted veteran M&A dealmaker Rush Benton, senior director for strategic acquirer Captrust. “RIAs with $3 billion and $5 billion in AUM are telling us, ‘we don’t scale either.’”
Talent and tech: “A lot of firms are coming to the realization that their talent is at risk if they don’t step up their game,” said Kevin Corbett, head of strategic initiatives for Mariner Wealth Advisors, one of the industry’s most active strategic acquirers. “Good people are hard to find and they want to take advantage of the best career opportunities they can. If the firm they’re with can’t give it to them, someone else will.”
Many RIAs are also realizing that their tech stacks have become outdated and that partnering with a larger firm makes more sense than a big capital spend on tech, the panelists agreed.
“It’s really eye-opening when advisors see a tech department with over 30 people,” Benton said. “They realize what’s possible.”
FOMO: “You’re seeing more fear of missing out,” said Tony Parkin, vice president, business consulting for Schwab Advisor Services. “Valuations are high, competitors are getting bigger and everyone needs talent. There’s just more pressure to do deals. It’s hand-to-hand combat out there.”
Indeed, in today’s market, buyers — many capitalized by private equity firms — are lining up at sellers’ doors. Benton said Captrust was one of 30 buyers wooing an RIA that recently went up for sale.
The market is further fueled by RIAs fearful of a decline in the market and a subsequent drop in the value of their firms, which is so closely tied to AUM. “It’s a pressure point,” said DeVoe. “Firms are wondering what will happen if they wait too long.”
Better deal terms: Sellers are receiving more cash at closing and “shorter and sweeter” earnouts, Benton said. “More cash when the deal closes means less risk for the seller,” he noted.
What’s more, deal structure has become more important to sellers, who are now in a position to demand — and receive — more favorable terms, according to DeVoe.
