For these deal makers, RIA consolidation is a race for scale

The consolidation of the RIA industry is happening in real time as the big players get bigger in pursuit of the holy grail of scale. An example is 13t annual Deals and Dealmakers Summit, which was held recently in Dana Point, California.

Dana Point is known for its cliffs and surf culture, and is also home to Echelon Partners, a leading investment bank in the industry focused on wealth management. Led by founder and CEO Dan Seivert, Echelon brings together executives, consultants, financiers and advisors to explore how to best prepare to pass on advisors’ wealth and assets to the next generation.

This is especially important as aging founders in the industry have built valuable businesses but failed to plan for internal succession. Add to that the abundance of buy-side options and private equity’s voracious appetite for these attractive, cash-flow-generating businesses, and the conference is definitely a deal-making time.

According to Mike Wunderlie, managing director of Echelon, these trends are confirmed by industry statistics.

“Deal volume continues to exceed expectations,” he said, “and 2024 is poised to become the second-biggest year on record, with a CAGR of 10.3% over the past five years.”

A large portion of this volume was PE funding through RIA buying platforms like Wealth Enhancement Group, Mercer Advisors and others, which use capital to acquire multiple small and mid-sized companies whose smaller assets under management immediately become valued at a higher multiple, creating massive leverage.

Despite all the hustle and bustle of making deals, Wunderli believes the buying community has become much more disciplined.

“Professional acquirers are now much more discerning,” he said, “making more strategic acquisitions to include professional services like tax, estate planning and alternative investments to complement their family office capabilities, rather than just acquiring AUM.”

As PE investors have become more interested, Wunderli noted, they are also financing minority investments. This is becoming an area of ​​focus for leading firms like Emigrant Partners and Constellation Wealth Capital, which attended the conference. Their approach has been to build strong networks of portfolios of growing companies.

The trading community also remains focused on interest rates. With interest rates rising dramatically over the past few years, many observers predicted a drastic reduction in trading volume. And while wealth management has not been affected, interest rates have had a major impact on financial services in general.

“Wealth management remains a unicorn,” Wunderli said. “Wealth management M&A activity is up 45% in a higher interest rate environment, while the broader financial services sector is down 30%.”

Wunderli noted that there have been several large transactions recently, such as the acquisition of AssetMark, Focus Financial and Envestnet, which could have skewed the data.