Although the acquisition of wealth and retirement advisory firms has been occurring for many years, today's climate has become much more dynamic.
The market for independent registered investment advisers has become one of the faster growing sectors in financial services and a new set of buyers has emerged, led by private equity.
PE firms typically focus on economics versus control over day-to-day operations. They see value in the cash flow an independent RIA can generate and the strategic value in acquiring a firm that is complementary to an existing investment.
This trend began with the emergence of bigger, stronger and well-capitalized strategic and financial buyers.
Higher number of sellers
Larger targets have formed, as there are a greater number of organized, large national and regional firms that are attractive targets for buyers.
Larger markets have evolved as growing pressure on firms and an aging adviser population continue to increase the number of sellers.
Several high-profile transactions that have occurred in the past 10 years show that RIAs have transferrable value.
Finally, better business practices have emerged as more RIAs are taking steps, such as hiring professional managers, to run their practices like a business and help make themselves more attractive to the market.
Two PE M&A models currently dominate: direct and intermediary. Recent PE investments in retirement adviser firms have primarily come under the intermediary model through their significant investment in the insurance brokerage, and to a lesser extent in the wealth space.
The most active PE-backed insurance brokerage and retirement firm buyers have been NFP (Madison Dearborn and HPS), HUB International (Hellman & Friedman and Atlas Partners) and USI (KKR). Recent emerging entrants include OneDigital (New Mountain Capital) and AleraGroup (Genstar).
PE also has made investments through intermediaries in retirement firms through wealth aggregators. For example, branded acquirer United Capital purchased PFE and strategic acquirer Focus Financial invested in Sentinel and BFS.
The accelerated aggregation of insurance brokerage and retirement firms is occurring for several important reasons.
Like retirement advisory firms, insurance brokerage firms work primarily with institutional customers, and these employer buyers are beginning to think more holistically about benefits and retirement.
Retirement advisers like the potential cross-selling growth prospects these firms provide.
In addition, insurance brokerage firms have the infrastructure to support their business and the capital to build centralized service functions, acquire additional partner firms and build out wealth businesses as retirement advisers focus more on engaging the plan participant.
Services over the life cycle
Many firms are looking to deliver advice in an integrated model across the different retirement life cycles: the accumulator inside the 401(k), the job changer with the IRA rollover and the retiree transitioning to a fixed retirement income. The aggregation of retirement and wealth businesses allows firms to be best positioned to execute here.
For example, Hellman & Friedman bought Financial Engines in 2017 and then combined the firm with Edelman, establishing a retirement plan to participant wealth vertical — and forming the largest RIA in the U.S.
Lightyear Capital bought a majority interest in HPM Partners (now Cerity Partners) in 2017. Cerity Partners then acquired retirement and wealth advisory firm Blue Prairie Group in April of this year, which was their second acquisition in the retirement space after Pension Architects.
In terms of direct PE M&A with retirement advisory firms, size has been a deterrent as PE firms like to write big checks that will impact their investment portfolios. Except for a few firms like Captrust and SageView, retirement plan advice firms have been too small for PE to invest in them directly. However, this could change.
There are now at least 75 growing independent/RIA retirement firms whose size and capabilities are beginning to attract the attention of the PE firms. Many of these firms are actively acquiring smaller firms as well as building out their wealth businesses. In addition, retirement and wealth platforms like GRPF, Resources and SRP are bringing together firms to a common RIA/B-D along with core tools and services.
In addition to large PE firms, investment firms such as Kudu Investment and Merchant Capital are increasing their attention to providing capital in the RIA space and to retirement advisory firms specifically. These firms look to make passive minority investments in retirement firms, where the capital is used to grow through M&A.
As retirement adviser firm pressures, demographics and opportunities drive consolidation, expect to see continued interest by PE firms, especially around the aggregation of retirement and wealth businesses.