Our US correspondent reports on latest data showing the extent of M&A and consolidation in the North American wealth sector, wider trends, and what’s driving deals.

Despite a slowdown in RIA dealmaking activity last year, industry experts expect a rebound in volume in 2024.

M&A activity for independent advisory firms declined for the first time in a decade, dipping 5 per cent to 251 transactions, according to DeVoe & Company’s RIA Deal Book. DeVoe competitor ECHELON Partners reported a decline of 6 per cent, but recorded 80 more deals.

High interest rates, the resulting increased cost of capital and negatively impacted debt ratios were cited as “the main culprits” of last year’s slowdown, according to DeVoe & Co. Other factors were extended due diligence processes, evolving deal structures and “a great emphasis on the true value of a buyer’s equity.”

Nonetheless, the RIA merger and acquisition environment “remains healthy overall,” DeVoe maintained, citing that advisory firms need to attract talent, expand geographically and grow inorganically. 

‘Robust’ outlook
Dealmaking activity should also be boosted by “a growing supply of RIA sellers due to the lack of succession planning and aging demographics of founders” the report stated.

Indeed, the M&A market for advisory firms remains “very robust,” according to consultant Larry Roth, managing partner at RLR Strategic partners and the former CEO of Cetera Financial Group and Advisor Group.

As the number of available larger firms dwindles, Roth expects more demand for RIAs with less than $500 million in assets under management. Slow organic growth is also spurring the market, he said.

Looking ahead, Roth anticipates further consolidation among large firms, leading to a potential mega-merger when AuM levels approach $200 billion.

Private equity and minority buyers
In the meantime, trends including private equity interest in the market and RIAs selling stakes to minority buyers are expected to continue.

Already this year, one of the newest – and well capitalized – minority buyers has pulled off two major deals. Former Fiduciary Network CEO Karl Heckenberg’s Constellation Wealth Capital bought stakes in Lido Advisors, a Los Angeles-based firm with more than $19 billion in AuM and San Francisco-based Perigon, with $6.5 billion in assets.

Capital from private equity funded a jaw dropping 94 per cent of deals last November and PE-backed acquirers bought firms with a total of $877 billion in the third quarter of 2023. 

And private equity sees a long road ahead. At a panel discussion last fall, David Winokur, partner at Clayton, Dubilier & Rice, the PE firm that bought Focus Financial, estimated that “it’s going to be around 35 years until [the RIA] industry reaches a saturation point in terms of the point where it’s over consolidated.”