M and A

Wealth Advisors Expect Slower M&A, Future Leaders Face Affordability Challenge – Study

Tom Burroughes Group Editor March 1, 2024

Wealth Advisors Expect Slower M&A, Future Leaders Face Affordability Challenge – Study

A variety of forces mean that the vigorous M&A activity that has been a feature of the North American wealth industry was seen as likely to fade somewhat. One issue raised in the study was how firms think the future leaders of these businesses will find it tough to buy out their owners. Liquidity emerges as a concern.

Wealth advisors polled in the summer and fall of last year expected less future M&A activity in the wake of the red-hot market seen before. Data also shows that the future cohort of business leaders will struggle to buy out these firms, raising questions about succession and liquidity.

DeVoe & Co, an advisory firm operating in the wealth management space, which surveyed 102 people at RIAs found the percentage who expect an uptick in transaction volume over the next twelve months plummeted from 42 per cent to 18 per cent in the most recent survey. Their expectations were likely compressed by the paradigm shift of advisors observing a drop in M&A after a crescendo of record years. 

Respondents were senior executives, principals, or owners of RIAs ranging in size from $100 million to over $10 billion in assets under management.

The rise in US interest rates, the fact that sustaining a fast pace of M&A activity is unlikely to take place without some pause, has affected the overall temperature of the market. This news service has chronicled how, for example, a desire for economies of scale to handle rising costs, coupled with the wish by older advisory firm owners to retire, has helped fuel M&A. One noticeable feature has been private equity funds’ dominance in the space.

It’s getting costly
The survey showed that internal leaders of RIAs don’t think they can afford to buy out the owners. Only 18 per cent of respondents said their next generation of such leaders could do so.

“This is an alarming figure for a hyper-fragmented industry with a bias toward internal succession, and the percentage of this NextGen Affordability Index has been dropping quickly. Two years ago, the index was 38 per cent, last year it was 29 per cent,” DeVoe & Co said in its report.

The number who know NextGen cannot afford to buy out the founders increased too. Nearly half the RIA leaders it surveyed (45 per cent) think that NextGen advisors cannot afford to buy out the founders, rising from the 30 per cent who held that view two years ago.

“Finally, the trendline for those who simply don’t know is also heading in the wrong direction. Ignorance may be bliss, but in this case, that blissful state is increasingly short-lived and has profound implications. Thirty-seven per cent of RIA leaders reported that they don’t know if their own advisors have the wherewithal to acquire their firm, up from 32 per cent two years ago,” it said. 

DeVoe issued a stark warning: “These sobering statistics outline a clear trend: The NextGen Affordability Index has sunk into a concerning zone, the looming succession crisis that many have feared for decades may very well be upon us.”

One optimistic note in this picture is the rising valuation of RIAs, which have steadily increased from a low in 2008 to sustained all-time highs since 2020, it said.

Liquidity was the top reason for pursuing an external sale of a firm. More than half of potential sellers (57 per cent) cited it as a key driver in their decision-making process. Additionally, the prioritization of liquidity is surging: 2023 saw a 13-percentage point spike from the year before. It represents the biggest shift in seller sentiment that we have seen in the history of this study, DeVoe said.

“Given the downward shift in the NextGen Affordability Index, it is no surprise that liquidity and succession are surging. Advisors who realize they can’t sell internally naturally, are shifting to plan B: an external sale. It is reasonable to extrapolate that these dynamics will drive an overall increase in M&A during the next five to seven years,” it added.

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