RIA M&A Declining, But Future Is Bright

David DeVoe
Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

DeVoe’s Q1 RIA Deal Book Reports Decline And Plateau, Interest Rates Hindering Consolidators, Midsize Sellers Plummet And 2023 Uncertain But Future Upward Trend Expected

DeVoe & Company’s RIA Deal Book for the first quarter of 2023 reveals weakness in RIA M&A. “2023 started with a whimper,” according to the report. For the first time in almost a decade, a year opened with a first quarter weaker than the prior year as M&A in Q1 this year was 7% lower than the same quarter of 2022.

While transactions increased slightly to 63 in Q1 2023 versus 61 in Q4 2022, that fourth quarter was 20% below the previous fourth quarter of 2021. The report stated, “The RIA M&A transaction volume that plateaued in 2022 has sustained itself into the new year.”

Factors In The Decline

The firm attributes the decline to a “confluence of factors, some of which have historically directly impacted M&A, and others that likely fatigued sellers. A declining stock market and rising interest rates conspired to compress revenues and increase acquisition costs.”

The recent banking crisis was among the factors attracting advisor attention in the first quarter, in addition to inflation, human resource challenges and a stalled economy, the firm said. Even consolidators pulled back on activity in the quarter, with some buyers not completing transactions.

High Interest Rates Drag On Consolidators

Consolidators’ share of total transactions declined to 48% in the first quarter as compared to 50% for the full year 2022 and 54% for 2021, but they continued to be the dominant buyers.

“Consolidator models are sensitive to interest rate increases, which indirectly contributed to their slowdown,” the deal book states. “The higher rates increase the cost of financing current transactions. Additionally, and perhaps more importantly, the debt service on the loans from their historical transactions balloon. These costs not only erode future profits but can also limit access to additional capital or, at worst, threaten debt covenants.”

The decline in consolidators’ share of deals was replaced by an increased share of RIA acquirers, which increased from 23% of the market in full-year 2021 to 27% in 1Q 2023.

Large And Small Sellers Increased While Midsize Plunged

The average seller assets under management (AUM) increased to $919 million in the first quarter as compared to the full-year average of $827 million for 2022, driven by increased sales at both the high and low ends of the range, while midsize RIAs (between $501 million and $1 billion in AUM) fell off precipitously, with only four firms sold in Q1 2023 versus 22 in the first quarter of 2022.

Midsize sellers plummeted

Small firms (between $100 million and $500 million in AUM) accounted for 54% of sellers in the first quarter of 2023, an increase of 16 points over the same period in 2022. Large firms (between $1 billion and $5 billion) also increased to 29% of sellers in the first quarter, compared to 21% for all of 2022. Mega-size firms with over $5 billion in AUM increased to 11% for the quarter, compared to 6% for full-year 2022.

DeVoe attributes part of the rapid decline in midsize sellers to “the increase of smaller prospective sellers and sellers not being represented by investment bankers. These firms likely became fatigued by the implications of the unusual macro environment outlined earlier and chose to deprioritize a sale for the near term.”

Expect the unexpected

2023 And Beyond

“Buckle up and hang on tight,” says the deal book. Interest rates, market volatility, the banking crisis and future unanticipated events will contribute to uncertainty for RIA M&A. “There is no safe bet on whether 2023 will be another record year.”

Uncertainty aside, major players continue to have strong deal pipelines, including DeVoe and a dozen of the most active acquirers.

The report concludes, “Beyond 2023, we become more confident that M&A will trend upward. The structural underpinnings of the industry and the long-term trends point toward increasing activity over the long run.”

Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.

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