The 4 key drivers of RIA consolidation

With 242 total transactions — a 52% increase over the previous year — the number of mergers and acquisitions in the wealth management space set another record in 2021. After eight consecutive record-setting years, it will surprise virtually no one if 2022 blows last year’s total out of the water. Here are the four drivers that I believe will continue to push M&A volume higher.

First, running a small advisory firm has gotten incredibly complicated.

When my business partner and I started our RIA back in 1993 it was all comparatively simple. We filed with the SEC basically by duplicating the forms a friend had recently completed. We grew our client base by cold calling. And technology and infrastructure were minimal, with a couple of computers, a basic phone system, a CRM, planning software, a portfolio management program and a subscription to Morningstar.

Things have obviously changed.

Just for starters, the regulatory environment is so complex today that most small firms are forced to hire outside consultants just to keep up. And finding clients via cold calling is nearly impossible because most people are on do not call lists. And as for technology? I was reviewing our “tech stack” the other day and I counted 36 different software solutions in addition to all the Microsoft programs that come with Office. And, of course, I’m not forgetting cybersecurity, which itself is a massive endeavor.

The second driver of consolidation is the challenge of competing with the broader client service offerings of larger RIAs.

Most of the mega RIAs and bigger consolidators now offer tax planning and preparation. In-house estate planning is common, and many of the larger firms now employ subject matter experts in areas such as Social Security, Medicare planning, insurance, assisted living planning and more.

Further, many of these firms have robust marketing machines that attract hundreds if not thousands of new clients each year.

A third undeniable driver of M&A is that with an average age in the mid-50s, not only are advisers getting older, the median age for an owner of an RIA is in the late 60s.

The term “succession planning,” something almost no one spoke about a decade ago, is ubiquitous.   

The final major driver is firm valuations, which, as a result of three main factors, have never been greater. First, despite some recent jitters, the long-term bull market in equities has pushed up AUM, resulting in higher fees for the typical adviser. Second, competition is fierce because the private capital markets love the repeating revenues of the advisory space and routinely engage in bidding wars for the available firms. And third, although this could soon change, interest rates are still extremely low.

Even if a prolonged bear market conspires with rising interest rates and valuations do take a hit, the other factors driving M&A will continue to push more sellers into the market than we’ve seen in the past.

Frankly, I think we're still in the early innings of the consolidation game in wealth management.

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.