Going by recent headlines, deal-making in the first quarter got off to a strong start with 2024 appearing poised to rebound from the first down year for wealth management M&A in a decade.
In January, Hightower Advisors announced that it made a strategic investment in Capital Management Group of New York (CMG), which has $3.3 billion in assets. The same month, private equity firm Constellation Wealth Capital (CWC) made investments in Perigon Wealth Management, which has over $6.5 billion, and in Lido Advisors, which has $19.1 billion.
In February, Mariner Wealth Advisors agreed to acquire AndCo Consulting and Fourth Street Performance Partners in a simultaneous transaction that adds 100 associates and $104 billion in assets under advisement. The same month, LPL Financial signed a definitive purchase agreement to acquire Atria Wealth Solutions, which supports 2,400 advisors and 150 banks and credit unions that, combined, manage approximately $100 billion.
In March, Denver-based Mercer Global Advisors acquired Seattle-based MDK Private Wealth Management, which has over $2.5 billion in assets under supervision. And Focus Financial Partners was reportedly in talks to buy out the management team of SCS Financial, an affiliate firm with $30 billion in assets.
But it’s not all clear skies. Persistent inflation has the Federal Reserve hesitant to rapidly lower interest rates by a substantial amount. RIA valuations remain lofty. And buyers are being more careful about their acquisition targets.
The M&A landscape must contend with interest rates, RIA valuations and careful buyers.
To gain insights on where the M&A market is headed this year, WSR spoke with Bomy Hagopian, Partner at the M&A investment bank Berkshire Global Advisors; Mike Papedis, Founder and CEO of the RIA transition and growth platform Fusion Financial Partners; Alex Goss, Managing Partner at NewEdge Capital Group and CEO of NewEdge Advisors; as well as Tarah Williams, President and COO of Prospera Financial Services.
Interest Rates
“If policymakers cut rates this year, that will make it easier for some deals to get done due to the lower cost of capital,” Hagopian says.
Yet she points to major forces driving M&A activity in wealth management – including an aging advisor class, more investor appetite for financial advice, pressure for RIAs to provide additional services to clients, increasing operating costs for smaller or subscale RIAs, and continued investments from private equity firms in wealth management acquirers.
“These drivers create urgency for buyers and sellers, so dealmaking will continue regardless of what policymakers do,” she says.
Hagopian noted that last year deals were down slightly compared to 2022, but deal volume remained high even though the Fed tightened four times, boosting the federal funds rate to its highest level in over 15 years.
However, Williams argues that with interest rates still high, the margins for deals that involve leverage are far lower than in the past. For the pace to pick back up, either rates need to come down or RIAs need to adjust their price expectations, she warns.
2024 M&A Forecasts
Williams expects M&A activity to hold steady compared to last year. Goss, on the other hand, thinks 2024 could be a record year.
“NewEdge Advisors continues to have an M&A strategy focused on mid-career larger practices,” Goss says. “We want to partner with growing firms that already know how to find and service clients. We use our scale to drive cost and time efficiencies to these already high-performing teams. We use our capital to help our partner firms acquire practices for themselves. If it’s not additive to both of us, we won’t do a deal.”
In his view, a lot of the 2023 decline was due to revenues still being down from the 2022 market, so advisors delayed doing deals while their profits were temporarily lower. With the rebound, revenues and profits are back to normal and the pent-up demand for deals will unleash in 2024, according to Goss.
Papedis believes the more than 300 published transactions of 2023 demonstrate that last year still had robust deal volume, and that while short-term challenges exist in the economy and political landscape, secular trends remain favorable for a strong 2024 M&A forecast.
“Consider we are in the early innings of advisors’ succession plan implementations and a recognition that bigger is better for achieving scale and growth objectives, all of which flows to M&A transactions,” he says.
Furthermore, the RIA marketplace remains highly fragmented and represents tremendous opportunities for continued deal-making, according to Papedis. He also sees the emergence of the breakaway advisor as attractive new targets for buyers to add in their M&A strategies, with some transactions valued on goodwill versus historical financials.
Valuation Concerns
Sellers with unrealistically high valuation expectations are a hurdle for the M&A market in 2024, Papedis argues, since it has become common for advisors with little experience in RIA M&A to enter conversations with an inflated belief in the value of their business. He sees this as an understandable misconception for founders after they have launched, led the growth of the business and built up considerable emotional capital in their firm.
“At times our industry reporting or ‘bar talk’ does a disservice, as what usually gets out is the headline number of the transaction,” Papedis says.
This “total transaction” number is much higher than the actual deal compensation exchanged at closing, as down-the-line performance metrics must be achieved to add to the original transaction and some deal targets may be difficult to reach, Papedis explains. So when advisors hear about revenue multiples in transactions, they can mistakenly think those numbers will apply to their own firm.
When advisors hear about revenue multiples in transactions, they can mistakenly think those numbers will apply to their own firm.
“What is important is the continued success and growth of the RIA marketplace,” Papedis says. “As advisors become larger and more successful independent financial companies, buyers will be in abundance when deal-making time is ripe.”
Goss sees buyers quickly becoming more sophisticated as the market matures. As a result, even though the amount of sellers will remain high, savvy buyers will start turning away from some of those practices. Goss sees demand – and valuations – remaining strong for high-quality practices while sellers with low growth or declining assets under management (AUM) will soon see their practices valued much closer to the 1-2x gross revenue ranges.
Hybrid & IBD Sellers
Williams sees the tightening of regulations, along with increasing compliance and technology costs, as continuing to drive smaller IBDs, and hybrid firms with both an IBD and RIA platform, to sell this year – albeit perhaps at a smaller number than in the past.
In her view, firms that have been able to drive home their value proposition, paired with scale, have a greater opportunity to own the small-to-midsize space by speaking to the personalized touch that big firms lack. Williams also sees IBDs and hybrids as having more of an M&A opportunity due to the availability of net interest income to offset the higher leverage rate.
“Prospera is a buyer,” Williams says. “We have had great success doing what we call BD roll-ups or partnering with smaller BDs that are ready to let go of the burden of running their own firm. We take on all of that for them. They can maintain their name and focus on their business. We will continue to focus here, as well as on other acquisitions where we feel like we are a good fit and complement each other.”
Papedis agrees that small and mid-size dual registrant enterprises will continue to be sellers. Small hybrid firms will recognize that achieving scale, growth targets and staying competitive call for consolidation, he argues. Papedis also warns that the operational margin squeeze on small broker-dealers can make them unprofitable or unable to invest in modernization. Large hybrid enterprises, meanwhile, have capital or public equity currency to acquire smaller firms.
“What is defined as a mid-size firm today was considered large five years ago,” Goss says. “Scale is becoming more important than ever. If you’re not on a path to be big, you probably need to think about merging.”
PE Deals & Minority Stakes
Private equity is widely seen as a huge catalyst for both higher valuations and RIA consolidation. But, as Goss points out, PE firms account for a relatively small amount of total direct investments occurring in wealth management. Instead, acquisitions are often conducted by firms with PE partners.
That’s because most PE firms see little benefit in spending lots of time evaluating individual practices. They prefer to look for platforms and enterprises that can attract and acquire wealth management firms. Therefore, advisors seeking to sell their practices are much likelier to discuss M&A with PE-backed firms rather than with the PE firms themselves, Goss observes.
Those PE firms will spend considerable time understanding and evaluating CEO vision, firm management, client engagement processes, key employee talent, brand distinction, the technology suite and overall firm profitability, according to Papedis.
He also views minority investment stakes as potentially beneficial for both sides. Buyers can get access to high-quality firms that are not immediately open to majority stakes or total ownership transfers. Sellers can get capital for reinvestment into growth, strategic expertise, deal-making savvy, operational guidance and tactical alliances. These transactions also can address exit compensation for specific retiring partners, Papedis notes.
“Typically a minority investment makes sense when you want to take just a few chips off the table, or use the liquidity as growth capital. When you’re looking to sell 100%, there needs to be a long-term strategy,” Goss says. “Because whoever is buying you has some kind of structure that will help you grow faster than you could on your own.”
