M and A

Are RIAs Addicted To M&A?

Charles Paikert, New York, January 5, 2022

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Are mergers and acquisitions a wise strategy for RIAs, private equity firms and other players in the space? The past few years have witnessed a surge in deals, but as history teaches, not all of them work out.

Nearly two-thirds of RIA executives expect the industry’s already frenetic M&A pace to keep accelerating – and 39 per cent expect record high valuations to increase as well.

What’s more, independent advisory firms increasingly believe that buying other companies is the optimal way to grow.

Six of ten executives surveyed by DeVoe & Company’s annual RIA M&A Outlook said they planned to grow through acquisition within two years, a number that jumped to 74 per cent for RIA executives at firms with over $1 billion in assets under management. 

And nearly half of sellers said that growth was the main reason why they sold.

Down and dirty
In fact, the industry’s “dirty little secret” is its underperforming organic growth rate as determined by net new assets and “real same store sales,” according to Bob Oros, CEO of Hightower Advisors, a leading aggregator with more than $100 billion in AuM.

After stripping out market returns, many firms are growing “low single digits to no growth,” Oros said at a recent M&A webinar sponsored by Advisor Growth Strategies. “And I suspect that when we see the numbers after the impact of the pandemic, they’ll look even lower.”

Organic growth can’t keep up with M&A, agreed David DeVoe, principal at his San Francisco-based RIA consultancy and investment bank. “There’s no way firms can match the growth they get through acquisitions.”

“Most firms have grown their assets under management, but not necessarily their number of new clients,” according to the M&A Outlook. “Many firms struggle with organic growth. The average growth rate (ex-market) is around 5 per cent.”

Off the charts
The result has been a market that has seen eight consecutive years of record volume, capped off by more than 230 transactions in 2021, up by a staggering 540 per cent from the 36 deals DeVoe recorded in 2013.

“It’s a red hot sellers’ market,” said Dave Barton, head of M&A at Mercer Advisors, one of the most active buyers in the industry, speaking at the Advisor Growth Strategies webinar. “The reality is there’s more buyers, it’s driving up competition and driving up pricing. It’s classic supply and demand.”

Mercer has seen the number of buyers in the market quadruple over the last five years and prices for RIAs increased by around 20 per cent in the past 18 months, according to Barton. Some buyers (whose business model “might be an asset manager, for example”) are driving up pricing by a willingness to “gobble up firms at any price at any risk” using arbitrage, Barton said.

Price points
Both Barton and Hightower CEO Bob Oros maintained that their firms remained “price disciplined,” but acknowledged that they were also competitive when bidding for firms that met their criteria. 

Despite soaring valuations, many firms found that their business models justified paying higher prices, according to DeVoe. 

Nonetheless, Oros said Hightower won’t do deals “if things get expensive beyond what we’re comfortable with.” Likewise, Barton said that sales volume is likely to slow if and when there’s a “price convergence, where there’s no longer a multiple arbitrage between the buyer and the seller” and the price “doesn’t justify the risk.” 

While the industry isn’t “near that point yet,” he added, “we’re starting to approach it with some buyers at some scale.”

Meanwhile, aging demographics, the need for liquidity and a business that offers reliable recurring revenue flowing from a highly sticky client base continue to make RIAs attractive to buyers.

Two of the industry’s bigger players have wasted no time in adding new firms to their rosters: Hightower is acquiring TC Wealth Partners, a $1.6 billion Illinois-based firm specializing in retirement plan advice. 

And Cerity Partners, a fast-growing acquirer with $40 million in assets backed by the powerful private equity firm Lightyear Capital, is buying Brouwer & Janchowski, a $2.3 billion San Francisco Bay-area firm, according to a report in CityWire that quoted unnamed sources. Other recent deals include those at Focus Financial Partners (see here) and Canada-based CI Financial.

How long will the surge continue?
Five to seven years, the M&A Outlook estimates. 

“The business case has been validated by ‘proof of concept’ successes,” DeVoe said.

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