The financial services sector endured a dismal 2022. Stock and bond markets plummeted, thanks to monetary tightening which stifled dealmaking. Read below to see what this means for M&A going forward.

IPOs grounded to a halt. Buyers lost access to inexpensive credit. And sellers, spooked by gutted valuations, seemed content with their seats on the sidelines, waiting for a rebound.

But if there is one subsector of financial services poised for action this year, dealmaking advisors say, it’s asset management where revenue pressure is felt acutely but can be remedied speedily, at least on paper, via a business combination.

“Money management M&A activity has been light relative to the past few years,” says Jeffrey Stakel, principal, Casey Quirk, a unit of Deloitte. “Nevertheless, margins are flat and the headwinds for organic growth are tough. We expect the pace to pick up.”

Revenue growth remains under siege as assets inexorably shift toward lower-cost passive strategies, reducing management fees. It’s a familiar story, playing out for decades but the pace of the decline has sped up in just the past few years.

Aggregate money management industry fees in 2018 stood at 43 basis points, according to Casey Quirk; in 2021, aggregate fees fell to 40 basis points.

Asset management dealmaking is driven by the need for new capabilities, but also, Stakel says by “a strategic imperative to implement a more efficient operating model and achieve economies of scale.”

Examples of trends to watch in the months to come: wealth management deals driven by RIA aggregators buying RIAs; traditional managers buying private/illiquid/alternative managers to diversify revenue sources; and the arranged marriages of mid-sized firms pushing to keep up with “mega” firms (that is, firms with more than $500 billion in assets under management).

“Long-only, public asset management firms with between $200 billion and $500 billion – big, yet not big enough – are prime candidates for some form of business combination going forward as they push toward greater economies of scale that can’t be achieved on their own,” says Kevin Gallagher, principal, Casey Quirk.

According to the latest DeVoe RIA Deal Book, there were 203 RIA deals completed during the first three quarters of 2022, an increase of 23 percent compared to the first three quarters of 2021. 2021 saw a total of 241 deals.

DeVoe & Co. predicts total 2022 transactions will top 2021’s tally.

“We expect a focus on distributing private capital vehicles into the retail market, particularly among firms that had been focusing on the institutional channels,” explains Bing Waldert managing director, U.S. research, Cerulli Associates.

By the time 2023 is over, it might just be the case that retail assets, relative to institutional, will officially represent the larger slice of the assets-to-be-managed pie, which is just under $69 trillion. At year-end 2021, retail assets lagged the institutional market by $114 billion.
Cerulli’s most recent research, as of mid-December 2022, shows retail at roughly [$34.4] trillion versus [$34.5] trillion for institutional.

Multigenerational wealth transfer is one of the most significant factors affecting the high-net-worth and ultra-high-net-worth (HNW/UHNW) segment today—its impact in the coming decades is set to increase substantially, according to Cerulli. The firm projects that wealth transferred through 2045 will total $84.4 trillion. Of this, $72.6 trillion in assets will be transferred to heirs, while $11.9 trillion will be donated to charities.

Among the higher-profile wealth management transactions: Alera Group’s acquisition of $1.5 billion-in-assets Johnson Brunetti; Edelman Financial Engines’ acquisition of Smart Investor ($680 million in assets); and Hub International’s acquisition of WealthPlan Advisers ($2.3 billion in assets).

What’s driving wealth management deals? PwC’s Gregory McGahan says its due in large part to aggregators/consolidators of RIAs.

“However, we believe the landscape of wealth management advice is changing,” says McGahan, who co-heads asset and wealth management advisory at PwC.

“Larger wealth managers continue to look for new and improved technology to digitize their wealth management offerings and deliver remote human advice, particularly as their client base trends younger.”

UBS’s acquisition $1.4 billion acquisition of Wealthfront is a prime example of a traditional player recognizing a shift among younger demographics, who seemingly prefer to make their own investment decisions, informed by data.

So-called “wealthtech” will not be the only key driver of wealth management deal activity when looking out over the next few months. Retirement recordkeeping is also a subsector viewed as ripe for consolidation and strategic alliance.

“In a bear market, the deal math makes it hard for sellers to come to terms because there is an instinct to wait it out until there is a rebound,” Casey Quirk’s Stakel says, summarizing the latter part of 2022. “Add to that equation the fact that interest rates have gone up, making it more difficult to finance these deals, and it’s not surprising there has been a pause. Nevertheless, margins are flat and the headwinds for organic growth are tough. We expect the pace to pick up.”