In the dynamic landscape of mergers and acquisitions among registered investment advisory (RIA) firms, a decade-long trend of record-setting activity experienced a shift last year, as indicated by DeVoe & Co., a notable consulting firm and investment bank.
The year 2023 saw a slight downturn in such transactions, with 251 deals recorded, representing a 5% decrease from the 264 transactions in 2022. This decline marks the end of a nine-year streak of continually escalating M&A activity in the RIA sector.
This slowdown is largely attributed to the impact of high interest rates and other macroeconomic challenges that influenced the decision-making and financial strategies of potential RIA buyers. The heightened interest rates notably increased the cost of capital for these buyers, tempering the previous momentum in the acquisition market.
Despite a notable increase in activity in the fourth quarter, this upsurge was insufficient to counterbalance the earlier lull in deal volume. The RIA M&A landscape has been buoyed over the past decade by several key factors: the wave of baby boomer advisors moving towards selling their firms after benefiting from a prolonged bull market, the influx of private equity investment attracted by the consistent returns in wealth management, and the need for RIAs to achieve greater scale to manage rising compliance and technology costs. In 2023, repeat acquirers were responsible for almost 90% of the transactions, highlighting a trend of consolidation within the industry.
Wealth Enhancement Group emerged as the top acquirer in terms of the number of transactions, completing 16 deals. This was closely followed by Mercer Advisors and CapTrust, each with nine deals. Furthermore, eleven firms executed six or more transactions throughout the year.
While 2023 witnessed a deceleration in M&A activity, it was far from a lackluster year. The transaction volume, though reduced, was still nearly three times the volume seen five years earlier. The RIA sector continues to be a vibrant marketplace with a substantial number of both prospective buyers and sellers.
The outlook remains optimistic, with DeVoe & Co. projecting a conducive macroeconomic environment, especially if the Federal Reserve opts to reduce interest rates later in the year. This potential shift could energize the M&A space, given the ongoing presence of numerous potential sellers and interested buyers who are keen on building larger, more expansive firms.
David DeVoe, founder and CEO of DeVoe & Co., anticipates that RIA M&A activity will maintain its vibrancy over the next few years, driven by ongoing succession needs and the evolving competitive landscape. He predicts that 2024 could see between 240 to 270 transactions, with activity likely to escalate as interest rates decline. This forecast underscores the continuing dynamism and strategic importance of M&A activities in shaping the future of the RIA sector.
