It isn’t a favorable environment for dealmakers. Surging interest rates, a looming recession and quantitative tightening have sucked the fervor out of the mergers and acquisitions market. However, the incentive to consolidate the U.S. registered investment advisors (RIA) is so high that the sector seems to have skipped this M&A slump entirely.
“2022 was one of our strongest years for M&A activity overall, with 30 announced or closed transactions – 6 new partner firms and 24 mergers,” says Lenny Chang, senior managing director and co-founder at Focus Financial Partners. The firm wasn’t the only one having a great year. Total deal volume in the wealth management sector grew for the 10th consecutive year in 2022, according to Echelon data. The number of transactions was 10.7 percent higher than 2021.
In contrast, general M&A activity was struggling in the second-half of 2022. Global deal volume slumped from $735 billion to $719 billion in the fourth quarter of last year, according to Bloomberg. That’s the lowest quarterly volume in six years. Deals involving a controlling stake in the entity dropped to the second-lowest level since 2017.
Chang believes dealmakers in the RIA sector are diverging from the global average because the industry’s need to consolidate is secular, not cyclical. “The primary catalysts for consolidation – succession and the need for scale – are not market dependent,”he says. “Even extreme market volatility tends to just delay transactions, as we most recently saw in 2020/2021, and this industry continues to consolidate.”
2023 is shaping up to be another strong year for buyers and sellers in this niche. Independent RIAs are expected to seize nearly 29 percent of total assets under management across the U.S. wealth management space this year, yet 94 percent of these advisors have less than $1 billion in assets under management, according to LLR Partners and Cerulli Associates. The market is severely fragmented and still ripe for consolidation.
Clients could benefit from greater consolidation too. Scaled-up RIA firms could offer better cash management, deal flow, due diligence and reporting to support the growing needs of the world’s wealthiest. “The evolution in client priorities is underappreciated,” says Chang. “Ultra-high and high net worth clients, which are the core segments that our 88 partner firms serve, are continually seeking greater breadth and hyper personalization of services offered by their advisors.”
Focus Financial’s Chicago-based partner firm Kovitz has already announced the acquisition of Origin Investments. “We have a robust pipeline, including international expansion opportunities, and anticipate that 2023 will be another strong year,” says Chang. “Our partner firms remain very active in pursuing mergers to accelerate their growth, expand their geographic reach, and enhance their client service capabilities.”