A report examines the forces shaping mergers and acquisition activity in the North American wealth management space, noting that the tougher economic climate of 2023 did not cause a major falling off in M&A.

While RIA dealmaking slowed in 2023, it held up relatively well considering economic uncertainties and rising borrowing costs, according to a study from Advisor Growth Strategies.

“RIA M&A activity experienced only a modest decline in transaction volume. While valuations remained stable, the tone for market participants was cautious optimism,” according to the 2024 RIA Deal Room report from the management consulting and transaction advisory firm. This report was sponsored by BlackRock.

As reported and commented upon earlier this year, M&A activity for independent advisory firms declined for the first time in a decade, dipping 5 per cent to 251 transactions (source: DeVoe & Company’s RIA Deal Book). Another firm advising on M&A in the space, ECHELON Partners, has reported a decline of 6 per cent, but recorded 80 more deals.

The resilience of M&A in the wealth sector has struck the Advisor Group Strategies' report authors, Brandon Kawal (partner) and John Furey (managing partner).

“The test of any relationship is surviving the first big fight, and 2023 brought the most significant turbulence RIA M&A has seen in over a decade,” they wrote. “The relative calm surface masked some reshuffling among buyers and sellers that will chart new ground in 2024 and beyond. Buyers adopted a more diversified strategy for deals in 2023. Breakaway teams, carveouts and lift-outs, and target-rich complementary services such as tax and insurance proved channels for acquirers to grow organically.”  

The authors noted that acquirers had “clear buying preferences.” Overall, the most popular acquisition targets ranged from $200 million to $500 million in assets under management and focused on financial planning. The least popular acquisition targets had low net-of-organic market growth (less than 5 per cent) or focused on a hybrid model that included commission business (greater than 20 per cent of revenues). Previous analysis shows that acquirers pursue less than 20 per cent of deals they evaluate.

Multiples
In other areas, the report said deal multiples are highly correlated to the size, and multiples rose as the target firm’s AuM, revenue and earnings increased.

In terms of specific sectors, the report noted that independent broker dealers (IBDs) became buyers – Raymond James, LPL Financial, and Commonwealth, among others. It also noted that Canada’s CI Financial – a big RIA buyer in recent years – recapitalized with highly structured capital, and delayed previous plans for an IPO of CI’s US wealth business. It also noted how Focus Financial’s decision to go private was a hit to the public equity market.

Other trends: RISE Growth Partners and Constellation Wealth Capital joined groups such as Wealth Partners Capital Group and Merchant Investment Management as specialist investment management. Not all plans worked out: United Capital Financial Advisors, an early adopter of RIA M&A, was bought by Goldman Sachs, but Goldmans later sold UCFA to Creative Planning.

Structures
Deal structures increasingly prioritize equity, reflecting a trend that began in 2022, with buyers seeking risk alignment and partnership-oriented deals while sellers explore creative monetization options such as minority stakes.

Sellers continued to enjoy a fruitful market in 2023, with demand remaining stable and a diverse range of acquirers entering the fray, the report said.