Generational Shifts Fuel M&A Optimism Amid Changing Macro Environment

Larry Roth, CEO, Wealth Solutions Report

M&A Landscape May Get A Boost From Succession Planning Needs, As Sellers Seeking Deal Assistance Grow Tired Of Waiting Out The Uncertain Economic Landscape

If you lead an RIA or independent broker-dealer, you probably are trying to figure out whether the lower-than-expected U.S. inflation readings – and minimal recession red flags – mean the Federal Reserve is finally done with its historic interest rate hiking cycle, and how that would affect your firm’s ability to conduct mergers and acquisitions going forward.

Indeed, appetite for M&A in the wealth management space is looking good on the whole, despite a few notable headwinds persisting in 2023. Our recent coverage sheds light on how firms can address generational shifts, succession planning, cultural fit and platform integration to improve their odds of M&A success in 2024. Meanwhile, key players in independent advisor services see a path toward accelerated growth through M&A support.

Let’s bring all of this together, beginning with an assortment of market data that may help RIA buyers and sellers get a better sense of overall activity and what’s driving deal flow.

Market Data

According to the Fidelity Wealth Management M&A Transaction Report, October had 17 RIA deals totaling $14.5 billion in purchased assets, which was 13% higher than September’s activity and 23% higher than September’s purchased assets. October showed a 31% year-on-year improvement in activity and a 62% year-on-year improvement in purchased assets.

Firms with less than $1 billion in assets represented 76% of October’s activity, while strategic acquirers with private equity backers represented 88% of October’s deals and 59% of purchased assets. October was the first month of 2023 without a first-time acquirer announcing a transaction.

Strategic acquirers, industry consultants and bankers continue to report healthy deal pipelines, Fidelity says. The biggest RIA deal of the month was Sammons Financial Group’s acquisition of NorthRock Partners, with $5 billion in assets under management (AUM), and the biggest RIA deal of the year through October remained Cetera Financial Group’s acquisition of $42.6 billion AUM Avantax in September.

It’s also worth comparing third quarter M&A data from two major sources for RIAs: ECHELON Partners and DeVoe & Company.

ECHELON’s RIA M&A Deal Report found that in Q3 2023, buyers announced 86 transactions, 32% higher than the 65 deals announced in Q2 2023. According to ECHELON Partners, this was the most active third quarter on record, which likely shows the release of pent up demand, and the quarterly increase likely is reflective of increased economic optimism.

RIAs continued to dominate as buyers, but the quarter’s largest transactions included a diverse group of RIAs, private equity firms, insurance companies, pension plans and asset managers, ECHELON Partners found.

The DeVoe RIA Deal Book, on the other hand, found that the 65 transactions posted in Q3 2023, while higher than the 57 deals posted in Q2 2023, were still three fewer than the 68 posted in Q3 2022. After three quarters, RIA M&A volume was 9% lower than the same period last year, and 2023 seems likely to be a down year, according to DeVoe & Company.

Since less than one-fifth of advisors believe their next-gen advisors can afford to buy out the founders, RIAs should set up talent management programs to help sell internally, DeVoe’s Deal Book suggests.

Culture And Integration

Robert Sandrew, Chief Growth Officer at Integrated Partners, recently shared relevant data points with WSR on the importance of cultural fit and platform integration in M&A deals.

Robert Sandrew, Chief Growth Officer, Integrated Partners

He wrote that PwC’s comprehensive survey findings found that 82% of respondents who believed that significant value was eroded during an acquisition, saw an exodus of more than 10% of key employees post-transaction, while 65% of acquirers confessed that cultural issues stood as formidable barriers to value creation in their prior deals.

“Whether the strategic vision is rooted in holistic financial planning, aggressive expansion or a different trajectory, the integration with the acquiring firm’s existing framework, resources and expertise can yield immediate accretive bottom-line benefits,” according to Sandrew.

“This synergy becomes even more potent when an acquisition extends the range of services and capabilities offered, such as adding comprehensive tax planning or estate planning to a firm. The result is not just a one-time boost in profitability, but a foundation for sustained organic growth,” he said.

Dynasty’s M&A Strategy

Dynasty Financial Partners CEO Shirl Penney spoke about the firm’s M&A capabilities with Chief Market Strategist Ron Insana, during a media briefing for the Dynasty Investors Forum that was held Nov. 13 to Nov. 15 in Nashville, Tennessee.

Advisors on the Dynasty Network platform have the opportunity to utilize the company’s investment bank strategies to sell their firms or buy other firms, with Dynasty providing capital for the deals when needed. Dynasty usually purchases no more than 20% to 25% of any advisory firm it works with.

Shirl Penney, CEO, Dynasty Financial Partners

“There are a whole host of reasons for that. We have no interest in managing advisors. We work for them. They don’t work for us,” Penney said. “If someone is looking to sell the majority of their firm or all of their firm, we will put the financial capital behind the firms that we support to help them acquire an RIA. So our client would acquire another RIA, so sub-aggregation, if you will.”

Although some Dynasty M&A deals occur very quickly, the process often takes four to six months. One deal structure that recently has become popular with Dynasty’s breakaway advisors is moving under the ADV but having a set period of time – usually one to two years – before the final agreement is executed or the transaction is broken off.

This year’s market volatility and slowdown has in some ways accelerated consolidation, and the number of deals likely will keep accelerating in the next 12 to 24 months, according to Penney.

Potential sellers who previously wanted to wait another couple years for valuations to improve have had to factor in how Fed rate hikes, which led to higher debt costs, may impact potential buyers in the future. Dynasty’s market intelligence has found a slight pullback in multiples from a valuation standpoint, along with tighter credit, but an increase in deal terms.

“There were a lot of advisors who were saying, ‘You know what? Maybe I was sitting here waiting for the perfect time to sell.’ There is no such thing,” said Penney, who also pointed to the aging population of advisors as a big driver.

At some point, when older advisors think of their retirement and succession, they may discover much greater flexibility in the RIA space regarding how advisors choose to monetize their business, he said, because it’s easier for such advisors to stay on and delay retirement, for example by becoming a vice chairman or helping mentor colleagues.

“Early innings, very bullish on it, more and more advisors are becoming M&A ready,” Penney said. “It’s a big part of our growth, to help our advisors grow via M&A. I think it’s only going to continue to accelerate.”

‘Succession Your Way’ At Prospera

WSR also recently reported that Dallas-based broker-dealer Prospera Financial Services announced the expansion of its Succession Your Way services for advisors, which helps them navigate the process of selling or acquiring a practice.

The Associate Advisor program provides customized support to advisors who have sourced and are developing an associate with plans to become a successor. The Advisor Practice Exchange Program (APEX) has a dedicated Prospera home office team guide an advisor-to-advisor process for practice transitions. And in the Prospera Wealth Advisors (PWA) program, Prospera purchases the book of business, which an in-house PWA advisor will manage.

Tarah Williams, President and COO, Prospera Financial Services

“Just as each advisor measures success differently, they will be able to approach succession planning on their own terms,” said Tarah Williams, Prospera’s President and Chief Operating Officer. “Having a specialist available to talk things through, offer an objective perspective and help develop a customized succession plan is invaluable.”

The programs, which are designed to accommodate the monetization needs of older professionals, can connect advisors with valuation services, lenders and attorneys familiar with the sale process. Prospera increased revenue 113% over the previous five years, growing both organically and through M&A.

Demographic Shift

Jessica Polito, Founder and Principal at Turkey Hill Management, a Westport, Connecticut-based M&A consultancy, has been working with wealth management firms that range in size from a few hundred million up to several billion in AUM.

In recent months, she has had more conversations with people in their mid to late 40’s than ever before. Such a demographic shift may present opportunities for buyers who have been struggling to acquire talent with a runway.

Jessica Polito, Founder and Principal, Turkey Hill Management

“The younger set of sellers do come with a particular set of challenges that a seller closer to retirement may not have to the same degree,” Polito told WSR. “Namely, that the company that they sell to may end up being their partner for the next 15-plus years, whereas someone who is 60 years old may only have three to five years ahead of them. What this means is that finding the right fit beyond economics is more important than ever before.”

Many sellers are looking for a partner that they can grow with – both in terms of career trajectory and in terms of adding value to the parent company and, in turn, participating in the growth of the value of the combined entity, according to Polito. She sees being intentional during a sale process as the way to find that fit.

“This means not holding back on questions a seller may be embarrassed to ask or feel like they are supposed to know the answer to,” Polito says. “By the time they get to signing, a seller should be comfortable enough with a buyer to anticipate how they would respond in a difficult scenario, based on the relationship they have built up to that point.”

Larry Roth is CEO of Wealth Solutions Report and Managing Director of RLR Strategic Partners.

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