DeVoe Predicts First Down Year for RIA M&A in Almost a Decade

The dealmaking boom in the registered investment advisory industry may finally have peaked, according to analysis released Monday by consultancy DeVoe & Co..

High interest rates, persistent inflation and market uncertainty are the key factors depressing dealmaking, according to DeVoe’s M&A report for the second quarter. While the market remains active, 2023 could be the first year to show a decline in deals after nine consecutive annual increases.

“Given the slow start of M&A activity for the year and expected persistence of the macroeconomic conditions, it is unlikely that 2023 will be another blockbuster year,” the firm wrote. “The first annual M&A decline in nearly a decade may be upon us.”

RIA deals have been one of the drivers of the convergence of retirement plan advisement and wealth management in recent years. Retirement and wealth aggregators such as CAPTRUST Financial Advisors, SageView Advisory Group LLC, OneDigital and Hub International Ltd. have all made DeVoe’s reports in recent years for dealmaking. But the deal-pipeline may be slowing, for now.

In the year’s second quarter, DeVoe reported 57 transactions, a 15% decline from the 67 completed in the same period in 2022. M&A is down 10% overall for the first half of the year with 120 total transactions, according to the consultancy.

“Both buyers and sellers are a bit more timid in the current market,” DeVoe wrote. “The macroeconomic conditions of high inflation, continued high interest rates and long-standing uncertainty in the economy and financial markets are likely weighing on the industry’s M&A activity.”

The Federal Reserve has been raising interest steadily since March 2022 to combat rising inflation and has indicated further raises may happen this year. The stock markets have been rebounding in 2023, with the S&P 500 up more than 19% since January.

More Selective

Part of DeVoe’s prediction of a down year comes from CEO and senior executive surveying. According to the firm, in its most recent polling there has been a jump in business leaders saying their deal pipelines were smaller than they were four to six months ago—clocking in at 33% of executives, as compared to just 7% in December.

Meanwhile, firms appear to be growing more selective in acquiring RIAs. In DeVoe’s surveying, 40% of respondents said they are being more selective in their approach to considering firms, compared with 27% in December 2022.

“Buyers are continuing to refine their optimal target—which is good for everyone, as it saves all parties time and will contribute to stronger, more aligned organizations,” DeVoe wrote.

When it comes to acquirers, RIA firms themselves have taken on more of a role than in the past, according to DeVoe. RIA buyers executed about 30% of the deals in the first six months, up from 23% in the same period last year.

Consolidator firms who acquire across different areas in search of growth are showing small declines in transactions in part due to “the interest rate environment” affecting their capital and economic positions, DeVoe wrote. Meanwhile, some are spending more time on due diligence, meaning transactions are taking longer to complete, all leading to a 17% drop in transactions for consolidators in Q2 to 29, down from 35 in the same period last year.

In the final category of “other,” which includes private equity, insurance and benefit companies, and broker/dealers, DeVoe continued to see PE as driving dealmaking. In the first half of 2023, private equity firms executed nine transactions, or 33% of transactions in the category. The firm pointed to a notable new entrant into the RIA space, Altas Partners, which invested in Mercer Advisors in June.

Smaller Packages

DeVoe also noted that, in the last 18 months, smaller RIAs in the $100 million to $500 million range have accounted for about half of the deal volume, part of an ongoing trend toward smaller purchases.

“These smaller RIAs are likely to feel the greatest competitive pressure in the evolving marketplace and typically are selling to gain the benefits of scale,” the consultancy wrote. “At the same time, interest in this segment from acquirers has increased, as smaller firms typically sell at lower multiples.”

Despite the potential for decline in 2023, DeVoe continued to forecast a strong M&A market in the “near future.” Nearly all of the major acquirers surveyed by DeVoe are optimistic they will maintain (40%) or increase (53%) their historical number of transactions in the next six months.

“As today’s RIA M&A dynamics are mainly being affected by the macroeconomic environment, DeVoe & Company expects that as the U.S. economy and stock market recover, and when interest rates decline, M&A will resume its upward climb,” the firm wrote. “Buyers have been and are able to digest acquisitions more effectively and have appropriately become more selective. Sellers can be more strategic in their decisions, as a degree of frenzy has subsided.”