As the wealth management industry evolves, mid-sized firms must actively participate in consolidation activity, transforming the space and seeking strategic opportunities to add scale and talent to ensure future success. From a vendor perspective, financial advisors may want to consider a mid-sized firm that has a similar service mindset, core value set and culture that they have cultivated over the years.
Growth in RIA M&A activity remains steady
According to one latest report from DeVoe & Companythe RIA M&A market has seen strong growth almost every year since 2013. After a post-pandemic bloat, transaction volume has remained stable for the past three years. While large RIA consolidators, which are serial acquirers with business strategies focused on growth through acquisitions, used to dominate deal flow, RIAs regardless of size are seeing increased M&A activity. In fact, DeVoe indicates that since reaching a peak of 54% of all transactions in 2021, consolidators have steadily lost ground to acquisitive RIAs that have accelerated their activity.
Lower cost of capital
Even with higher interest rates in recent years, the RIA M&A market remained strong. While the higher cost of capital affected valuations, bringing some very high levels closer to the ground, they did not dampen overall deal flow. That's because many other factors are at play—from changing client demographics to a wave of retiring advisers—that have added to the consolidation trend in the industry. And these factors do not go away. Add the Federal Reserve's new easing cycle and M&A activity may accelerate in the coming year.
Lower rates are likely to increase buyer activity as the cost of purchases decreases, making it cheaper for buyers to take on debt. As the cost of acquisitions falls, the math improves, allowing valuations to rise again. The biggest impact of the falling cost of capital is likely to be on private equity-backed consolidators. As debt service ratios improve, these companies will be more willing to deploy capital aggressively.
However, as valuations rise again, will financial advisers look to sell to the highest bidder? Some will, but we believe many will take a more measured approach, look at the whole picture and weigh the benefits for themselves, their staff and their loyal customers before signing on the dotted line.
Mid-sized firms can offer more than just high pay
When it's time to monetize the business you've spent a lifetime building, you deserve to be rewarded well. But if you're selling all or part of the equity you've accumulated, additional considerations should be part of your calculation.
At the top of your list should be how your valued customers will be treated. If the buying firm isn't committed to continuing the exceptional service experience and personalized support you pride yourself on providing, you may want to look elsewhere. Whether you're selling just part of your practice or staying for a pre-determined amount of time, you need to find a partner that offers a bespoke service environment and a culture that treats you with the respect you've earned.
You built an RIA because you believed the independent model was best; you enjoyed the freedom and control to run your practice as you saw fit and, as a result, sought to produce better results for your clients. Selling to a large RIA consolidator or consolidator whose primary focus is acquiring as many firms as possible may not be the best move to protect your legacy.
As you move away from the industry, the right mid-sized firm, a company with enough scale to compete with the bigger players on price, platform and product while offering high-touch, individualized services, may be a better decision.
Mid-sized firms may also be better positioned to offer you flexible terms to make the transaction more to your liking. This is especially true if you plan to stay involved and continue to grow your business after taking some of your equity off the table. Mid-sized firms have more of an incentive to work with you in a creative way that is a win-win for everyone involved.
So remember, while you deserve to be rewarded for the business you've built, be careful not to beat the highest bid from the biggest firm. There are nuances to consider that can make your transition more successful for everyone involved.
Michael Nessim is the CEO, president and managing partner of Kingswood US, an SEC-registered RIA and a FINRA-licensed broker/dealer