Industry leaders discuss M&A trends at RIA Summit 2022

Turbulent markets haven't slowed the pace of deals for registered investment advisers in 2022, which is set to be another record year for mergers and acquisitions.

The number of firms looking to sell is increasing faster than the number of available buyers, according to David DeVoe, founder and CEO of DeVoe & Co., who spoke on a panel about trends in M&A at InvestmentNews’ RIA Summit in Boston. The market is getting more competitive, so what is it that buyers are looking for in a potential acquisition?

A lot of emphasis is placed on multiples and revenue, but this can be a dangerous and inaccurate way to measure an RIA’s value, DeVoe said. While buyers look at a wide variety of variables when evaluating a possible acquisition, the factors can be boiled down into the three major categories — growth, profitability and risk.

For Merit Financial Advisors, which has been an active buyer in 2022, the ideal is a firm that wants to continue to grow but either lacks the capabilities to get to the next level themselves or would require years to do so without the support of a larger firm, said Merit president Kay Lynn Mayhue. Merit also takes a close look at leadership and staff to ensure any deal would be a cultural fit.

“The most successful transactions that we’ve been able to complete to date have been with people that ‘weren’t for sale,’” Mayhue said.

As for sellers, they should be considering carefully what sort of changes new ownership will bring to the business, especially in areas like adviser compensation and payouts, said Jim Gold, CEO of Steward Partners Global Advisory.

“As a seller, I would talk to as many people [at the buying firm] as possible,” Gold said, adding that advisers “should really engage expert counsel” to get the best deal.

While succession planning continues to drive M&A as the wealth management industry ages, there's an ongoing misconception that selling a firm means leadership will no longer have to work, said Phil Trem, president of MarshBerry’s financial advisory business. Most buyers want a firm that will maintain stability among leadership.

This misconception cuts both ways, as many RIAs won’t consider selling their practice because they aren’t ready to stop working, Trem added.

“Too many firms do transactions reactively,” such as in response to a major life event, he said. “A good deal doesn’t mean it’s the best deal.”

The panelists all recommended that firms take a close look at their businesses and clean up their books as much as possible before handing information over to a potential buyer. Too often, so-called “lifestyle practices” can have personal expenses on their profit-and-loss statements.

“Cleaning up your house and presenting a well-informed picture, that has a significant impact on your [firm’s] valuation,” Trem said.

[More: TAMPs and fee-based annuities headline first day of RIA Summit 2022]