A rare gloomy outlook on the future of RIA M&A

The record-setting pace of consolidation across the wealth management industry is heading toward some speed bumps in the year ahead, according to the latest report from DeVoe & Co.

For the first time in the six years the firm has produced its annual RIA M&A Outlook Survey, the findings show a marketplace of potential buyers and sellers that are viewing the glass as half full.

The report shows the impact of the dark clouds of economic and stock market uncertainty on both the pace of M&A activity and the record-level valuations of advisory firms.

The mood shift from the same time last year is stark, with 56% of participants expecting valuations to be somewhat to considerably lower in 2023, while only 8% expect higher valuations. That compares to 12 months ago, when just 8% of participants expected lower valuations in the year ahead and 39% expected higher valuations.

“The optimism of yesteryear has given way to a more subdued expectation,” said David DeVoe, founder and chief executive of the research firm.

“Their perspectives are likely grounded in history and logic,” DeVoe said. “Seasoned advisers experienced periods of lower valuations following past cycles of volatile market conditions.”

A report last week from DeVoe detailed the slowdown in deal activity during the final three months of 2022, particularly October and November. But the report said that the pace of deals is still on track for 260 this year, representing an 8% increase over 2021 volume.

In an industry where most revenues are tied to assets under management, valuations are tightly linked to the state of the equity markets and the outlook for those markets.

The S&P 500 Index is up 17% from its low point in mid-October, but it's still down 15% for the year, and the consensus outlook for next year calls for flat markets and continued economic challenges.

Only 42% of the advisers surveyed expect to see an increase in deal activity next year, which compares to a year ago, when 63% said they expected to see the pace of consolidation increase.

Asked another way, 25% of respondents said they expect to see less deal activity in the year ahead, which compares to just 4% a year ago.

Meanwhile, the profile of the RIA buyer is also evolving, according to the report.

Among firms with less than $1 billion under management, 47% said they plan to make an acquisition within the next 24 months, which is up from 42% during each of the last two years, and 43% in 2019.

Among firms with more than $1 billion under management, 59% say they’re planning an acquisition within the next 24 months, which is down from 74% last year, 63% in 2020, and 74% in 2019.

“These larger firms may simply be absorbing their recent acquisitions or assessing the impact of rising interest rates on their buying power,” DeVoe said. “Larger buyers still dominate the RIA M&A marketplace. We do not expect to see their dominance shift anytime soon.”