Drop in RIA M&A in 2023 likely to be blip in upward trend

Mergers and acquisitions involving registered investment advisory firms slowed last year, but that’s likely just a blip in an ongoing upward trend, experts said.

There were 251 RIA M&As in 2023 compared to 264 in 2022, a 5 percent decline, marking the first time in a decade that the number of M&As dropped on annual basis, according to the Capital Group DeVoe RIA Deal Book.

The previous nine years had seen record-setting numbers of RIA M&As. The pace slowed over the last 12 months due to macroeconomic factors, the report said.

“The broader context of rising inflation, global economic challenges and the outbreak of multiple wars dampened M&A activity,” the report states. “But the main culprits were high interest rates, which weighed on buyers, increased their cost of capital and negatively affected their debt ratios. Other factors contributing to the slowdown included extended due-diligence processes, evolving deal structures and a greater emphasis on the true value of a buyer’s equity.”

The slowing M&A activity was a “rational pause” and the pace is likely to turn back up, the report’s author said.

“I don’t see this as a harbinger for continuing decline,” said David DeVoe, founder and CEO of DeVoe & Co., an investment banking consulting firm for RIAs. “Instead, I see this as a short-term plateau. Over the next five to seven years, we’ll see an increase in M&A.”

The M&A traffic is likely to stay elevated because the founders of a number of firms are getting into their 60s and must start to address succession, DeVoe said. The challenge for internal handoffs is that firm valuations are making them too costly for the next generation to acquire, so they’re sold to third parties.

“We have a backlog of sellers that will come onto the market over the next several years," DeVoe said.

The report said that while M&A increased in the fourth quarter that acceleration wasn’t enough to overcome the brakes that had been put on M&A earlier in the year.

That was a phenomenon also noted by Brandon Kawal, a principal at Advisor Growth Strategies, a management consulting and transition advisory firm specializing in RIAs.

“It was a tale of two halves of the year,” Kawal said. The momentum at the end of 2023 “demonstrated that the factors driving sellers to the market haven’t gone away. We don’t see any changes in demand from our perspective. We expect [2024] to be a busy year.”

In addition to succession, M&A activity likely will continue to be spurred by the appetite for RIA acquisitions from private equity firms and family offices.

Another element in the mix is market pressure. There are about 25 to 30 “meta RIAs” – such as Hightower and Edelman Financial Engines – that are large, backed by PE funding, have sophisticated management structures and offer an array of client services, DeVoe said.

Sometimes smaller RIAs decide they need to get bigger to stay competitive.

“Those major firms are doing more for clients,” DeVoe said. “They’re doing better business. They’re raising the bar for the industry.”

If the Federal Reserve cuts interest rates this year, as many observers are expecting, that also could catalyze M&A because it will lower the costs of transactions and provide more latitude on debt ratios.

“When interest rates decline, we’ll see less pressure for those [acquiring] firms, and they’ll re-energize,” DeVoe said.