FWR attended DeVoe & Co's recent annual conference in Chicago to hear about trends around mergers and acquisitions in the wealth industry, and how this is being affected by the challenging economic environment.

The Federal Reserve’s 0.75 per cent interest rate hike and the attendant gloomy reaction from Wall Street should put the optimism of the registered investment advisor M&A market to its severest test yet.

To date, however, despite what M&A guru David DeVoe described as a “very challenging macro environment” for mergers and acquisitions, RIA transactions remain on pace to set yet another record this year.

Concerns about high interest rates, a slumping stock market, inflation and a shaky global economy have so far been shrugged off by buyers and sellers of advisory firms, DeVoe said.

“Despite a perfect storm of factors that have historically slowed M&A, RIAs keep selling in record numbers,” DeVoe told over 200 industry executives in Chicago at DeVoe & Co’s annual M&A conference.

Recession fears spur sales
In fact, the threat of an imminent recession may be spurring the “rush of activity” in RIA transactions the last few weeks, according to Dave Barton, head of M&A for Mercer Advisors, the industry’s biggest buyer.

Sellers are “seeing a recession coming” and have decided to go to market now “before the recession hits,” Barton said, to “take advantage of high multiples today. No one knows what valuations will be after that.”

Mercer is still willing to pay high multiples but is being more selective and focusing on quality firms, Barton said. Deals now are also requiring more due diligence from both buyer and seller and taking longer to complete, he added.

“You can’t just do Zoom calls exclusively anymore after Covid,” Barton said. “Everyone is doing face-to-face meetings and the timeline [for completing transactions] has been extended.”
 

Sharing risk
Buyers are insisting that sellers share more risk in deal structures, senior executives at the conference said and, as a result, earn-out periods are becoming longer and more important.

Buyers at the conference also complained that too many sellers were coming to market too soon and unprepared. The percentage of “high quality” sellers has dropped dramatically, according to Barton. And Bob Oros, chief executive of Hightower Advisors and Jim Dickson, CEO of Sanctuary Wealth, both said too many sellers were presenting buyers with unrealistic growth projections.

Minority deals and sub-acquisitions are on the rise, dealmakers said. According to DeVoe, sub-acquisitions are on pace for a record year, currently accounting for 20 per cent of all transactions.

Will consolidators consolidate?
Consolidators, including Mercer, Hightower, Captrust, Focus Financial and Beacon Pointe continue to dominate the market. Large private equity-backed aggregators have accounted for more than half of transactions so far this year, according to DeVoe.

Veteran industry executive Mark Tibergien, the former CEO of Pershing Advisor Services who now heads his own consulting firm, predicted that “the consolidators will start consolidating – it has to happen.”

Jon Beatty, COO for Schwab Advisor Services, said he was surprised that a “mega-merger” hasn’t happened already. “It may be too early in the cycle,” Beatty said, “but it may happen some day soon.”

When the dust settles, there will only be “a few large consolidators left standing” serving 80 per cent to 90 per cent of the market, according to Barton.

Rose colored glasses
As for the surfeit of optimism among RIAs and M&A dealmakers, a recent DeVoe & Co survey found that three-quarters of advisory firms thought that deal volume would either hold steady or rise over the next year.

"Let’s see how long that lasts," industry veteran Corey Kupfer, who heads an eponymous law firm specializing in RIA M&A deals, said in an interview with Family Wealth Report.

“I was surprised that the impact of the Fed and the market hasn’t had a greater impact on deal volume or valuations,” Kupfer said. “I think this latest interest rate raise may have been baked into expectations. But I will be watching to see what the reaction is if things don’t cool down and there is another significant rate hike later on. I can’t image that wouldn’t have an impact on the M&A market.”