According to Piper Sandler & Co., a registered broker-dealer laying claim to completing 80 plus transactions with a combined $50 billion in total transaction value, there is a "virtuous circle" of M&A activity that has continued to climb since 2017. It seems that equity sponsors are backing more buyers because they want their piece of the wealth management space. Private equity sponsors have always played in the investor's space, but this is different. At the moment, they are breaking in as acquirers of large platform businesses then continue to follow-on acquisitions to scale those platforms.
In 2018-2019 55% of the total deal activity of platform transactions was fueled by private equity sponsors. Independent-owned wealth management firms are second in line as the most active dealmakers for wealth management firms, accounting for close to 20% of deal volume in the last two years. The strategic buyers (banks, broker-dealers, traditional asset managers, and insurance companies) are being continuously outbid in today's market.
Piper Sandler stated that the number of deals involving wealth management firms from 2017 to 2019 was 57-123. The year's beginning represented $169 billion in transacted assets under management, all done within 55 deals.
Fun fact: 2019 was 41% less than 2018 AUM was coming in at $251 billion even though the deal volume was over 58% bigger.
It seems there are a lot of high-net-worth individuals growing their personal wealth through the use of existing client referrals and relationships with influencers. The retention rate is worth mentioning at a booming 90%.
The Piper Sandler report identified the following factors as the reason for the momentum we are now seeing with the M&A consolidation trend.
• Advisory demographics: The wealth management space is graying. There is a rising need for succession planning, which is driving the M&A activity. The average age of a financial advisor is 55; 20% of them are 65 or older. This means that we will see one-third of all advisor's plans retire in the next ten years.
• Valuations: With the value of wealth management firms rising over the past decade, and equity building up, younger members of an RIA will have a hard time buying out the founders. Does a founder discount the value of their equity for an internal transfer, or do they attempt to sell to larger organizations, consolidators, or financial sponsors? Keep in mind that according to Fidelity research, M&A transaction activity is most active with wealth managers with less than $1 billion in assets.
• A big pool of possible sellers: Piper Sandler predicts that RIA acquisitions over the next five to 10 years will be around $2.4 trillion in assets. Note: of the 6,600-plus existing RIAs that manage less than $250 million in assets, more than half of them will be looked at to acquire or merge with. Of the 900 RIA firms with over $1 billion or more in client assets will be looked at from an acquisition standpoint from companies trying to increase their own firms' size. The $1 billion-plus RIA firms will most likely be buyers looking to grab smaller RIA firms.
• Increase in demand and resources: With technology changing and security becoming a huge concern. Most RIA firms that are smaller will have a hard time keeping up and may look to make deals with other RIA firms our third parties to help them stay afloat.
The RIA M&A market looks like it will be very active for the foreseeable future. If RIA businesses want to "check the value box," Piper Sandler states that ongoing deal volumes and continued interest from the majority of buyers should help valuations to do just that.