Retirement Advisory M&A Persists Amid Overall Deal Decline

Overall dealmaking among registered investment advisers “ran out of gas” in the third quarter of 2023, but retirement plan-related transactions appear to be running on hybrid engines, according to the latest report from consultancy DeVoe & Co.

Mergers and acquisitions started strong in Q3 but tapered off as higher interest rates, an uncertain economic environment and stock market volatility appeared to take their toll.

“Activity in July and August was above last year’s pace—and then the music stopped,” DeVoe’s report stated. “September yielded a scant 15 transactions (compared to 22 transactions in September 2022), erasing the previous months’ gains and resulting in another quarter of decline.”

With Q3 showing another year-over-year decline compared with last year, the likelihood of 2023 being a down year in aggregate is “calcifying into a reality,” the firm wrote.

Despite this downward trend, DeVoe still considers advisory M&A “healthy,” as consolidators, insurance aggregators and private equity firms continue to seek scale in the advisory space and smaller firms look for access to more resources, sell out or some combination of both.

“Although the RIA merger and acquisition environment is in a state of slight decline, the activity remains at a heightened level,” says David DeVoe, Devoe founder and CEO. “DeVoe & Company anticipates more robust quarters in the near term due to the replenished capital positions of many major acquirers, and we expect further acceleration when interest rates decline.”

Retirement Outlier

Upon closer scrutiny of the retirement plan space, the dealmaking “trend is inching up, and the size of transactions is larger than the average,” according to DeVoe.

Retirement plan activity made up 10% of transactions through Q3, versus 9% in 2022, with 19 retirement plan-related deals made in 2023 so far.

The deal size is also larger in this subcategory, DeVoe noted, averaging $935 million in 2023 versus the overall average of $838 million. Those deal averages excluded transactions of $5 billion or more.

DeVoe’s report pointed to a few key deals already completed this year, including:

• Pensionmark, the retirement plan and wealth advisory division of World Insurance Associates LLC, acquiring Tomorrow’s Financial Services ($5.5B) and Financial Solutions ($1.1B);
• CAPTRUST acquiring Southern Wealth Management ($2.3B); and
• OneDigital Investment Advisors acquiring Triad Financial Advisors ($863M).

Internal Deals Less Likely

DeVoe analysts, in related surveying, also found that confidence that the next generation of registered investment advisers can buy out the founders is declining.

In 2020, 39% of advisers said they believed the next generation within the RIA community could buy out the founders, avoiding an external sale. That response plummeted to 18% in 2023, according to the researchers, among 100 advisers at firms with $100 million or more in assets under management, and is “disconcerting,” the analysts wrote, as it shows the succession challenges that many firms face

While RIA experts had been anticipating this issue, David DeVoe gave two reasons for the quick shift in recent years.

“First, the high external valuations paid to RIA sellers in recent years have raised the economic bar for younger advisers to buy out founders—especially for mid-size or large firms,” DeVoe says. “Second, the significant increase in interest rates since the beginning of 2022 has pushed financing costs up dramatically.”

The consultancy recommended a talent management program for RIAs who hope to sell internally. Ultimately, the firm anticipates that the trend will lead to increased M&A activity as firms turn to external buyers.