Despite big Q1, pace of RIA consolidation seen slowing in 2022

The first quarter saw a considerable amount of wealth management industry consolidation, but expectations for the rest of the year are muted relative to the record-setting pace of the past few years.

The latest report from DeVoe & Co. shows 67 registered investment adviser acquisitions were announced during the first three months of 2022, which compares to 76 deals during the final quarter last year and 58 deals during the same quarter a year ago.

“It was a huge first quarter, but if you peel the onion back, you can see the steady decline,” said David DeVoe, founder and chief executive of the research firm.

While the 67 deals in the first quarter marked the second highest ever, behind the fourth quarter of last year, the monthly breakdown illustrates a trend toward a slowdown in activity. The 27 deals in January were followed by 23 in February and 17 in March, a level not seen since August 2021.

More than two years after the start of the Covid pandemic, DeVoe said that RIA M&A activity is no longer being impacted by the pandemic, but that the activity up to this point has to be considered in the context of the impact.

While there were 159 deals announced in 2020, the year the pandemic took hold, up from 131 in pre-pandemic 2019, the 242 deals in 2021 represented a snapback in confidence among buyers and sellers, DeVoe said.

“In 2021 we probably had some extra juice driving activity,” he said. “People were trying to outrun potential tax increases under the new administration, and some folks were probably still making decisions based on the immediate impact of Covid. But those drivers disappear in 2022.”

While DeVoe is still anticipating a good year for deals that could eclipse the record set in 2021, he said the pace of growth will likely be slower.

“Three years ago, M&A activity increased by 30%, year-over-year, two years ago it increased by 40%, and last year it increased by 50%,” he said. “We don’t expect it will go up 60% or even 50% this year. We think it will be a more modest increase this year.”

DeVoe said there are “lots of distractions that could delay M&A in a variety of ways.”

“Anytime there’s a steep decline in the stock market or a sustained period of volatility, M&A slows down,” he said. “People just don’t have as much time for M&A unless they’re bigger and have professionally managed teams dedicated to acquisitions, and we know 80% of the market doesn’t have a professionally managed team. So the crystal ball is a little cloudy when we go out a few months.”

The data also show that during the first quarter, the average size of acquired firms dropped below $1 billion for the first time since 2019, when the average was $747 million. In the first quarter, the average size of a firm being acquired was $962 million, which compares to $1.1 billion last year and $1.02 billion two years ago.

DeVoe attributes the lower average deal size to the expansion in the types of firms participating the industry’s consolidation.

“It’s an extension of a trend where mega transactions lead to large transactions and midsize transactions and smaller transactions,” he said. “On a given day, advisers of all sizes are contemplating selling, and when you see these bigger firms that you have admiration for selling, that’s proof of concept. They’re not doing it just because others are, but it’s more logical that this is a time to sell. And that helps drive people who are on the fence to make the decision to sell.”