For a long time, steady growth has been the norm for wealth management businesses. Over the past decade, the capital markets alone have driven revenues among fee-based wealth managers. However, the recent surge in M&A activity among billion-dollar firms has pushed the entire industry into unprecedented territory.
July 2024 saw 23 RIA M&A transactions with $104.5B in acquired assets – a 21% increase compared to the prior month and a 153% jump in acquired assets. It was the strongest July for M&A on record.1
While driven partly by an aging advisor population seeking to extract liquidity as they exit, a great deal more ignites this influx of deals. And the deeper trends and dynamics at play provide essential insights into the industry’s current and future state. Let’s take a closer look at six critical insights that lay underneath the surface:
- The Rise of Mega Deals: A Strategic Shift Towards Scale
One of the most significant developments in 2024 has been the marked increase in ‘mega deals’ within the wealth management sector. These are transactions involving firms with over $1 billion in AUM, and they’re becoming more common as acquirers look to achieve scale, expand services, and solidify their competitive positions.
According to RIA M&A guru David DeVoe, these mega deals are driven by more than just the desire to grow AUM. They’re part of a strategic shift where firms seek to acquire the capabilities to serve increasingly complex client needs and expand into new markets. It’s a trend that indicates a broader industry move towards consolidation – where the focus extends beyond acquiring more assets to building comprehensive, scalable platforms that efficiently and effectively deliver a broader range of services.2
This is a clear sign that the M&A landscape is becoming more competitive, with larger, more sophisticated players dominating the space. So you’ll need to carefully consider how your firm can effectively scale to remain competitive, or alternatively, better position your business strategically as an attractive acquisition target.
- Private Equity's Dominance: A Double-Edged Sword
Private equity has become a dominant force in wealth management M&A – driving a significant amount of all activity and creating a more sophisticated and competitive M&A environment. These firms not only provide capital necessary for acquisitions but also bring operational expertise and strategic direction to the firms they acquire.
Private equity’s involvement has also increased valuations, making it more challenging for smaller firms to compete. For those on the selling side, however, private equity buyers generally offer attractive valuations and the operational support needed to take the business to the next level.3
The trend presents advisors with both opportunities and challenges. On the one hand, private equity offers an attractive exit strategy with potentially lucrative terms. Conversely, the competitive power of private equity can make it more difficult for independent firms to scale or align themselves with strategic partners successfully.
- Valuation Pressures and the Importance of Strategic Fit
Valuations in the wealth management sector remain robust despite economic headwinds. DeVoe’s RIA Deal Book Q2 2024 notes that high demand for quality firms and a scarcity of top-tier acquisition targets keep valuations high.2 This situation forces acquirers to become more strategic in their choices, focusing on firms that enhance their current offerings and align with their long-term growth objectives.
This focus on strategic fit is crucial. Firms that align with the acquirer’s strategic goals (whether through complementary services, a solid client base, or technological capabilities) are more likely to command premium valuations. Simply having a profitable firm is no longer enough. It would be best to position yourself as a strategically valuable partner to attract top dollar in today's market.
- Technology Integration as a Value Driver
In today’s digital age, technology has become an increasingly critical factor in determining the success of M&A transactions. The Echelon Partners
Q2 2024 M&A Deal Report
underscores the importance of technology integration in driving operational efficiencies and improving client service. Firms that have successfully integrated advanced technology platforms are not only more attractive acquisition targets but also tend to command higher valuations.
Simply put, investing in technology is no longer optional. Whether through advanced CRM systems, digital client portals, or automated investment platforms, firms that leverage technology to enhance their operations are better able to attract interest from acquirers looking for scalable, efficient operations.
- Specialization and Niche Markets: The New Frontier
One of the more exciting trends noted by Echelon is the increasing focus on specialization and niche markets within the RIA space. Firms that cater to specific client segments (e.g., UHNW, particular industries or professions) are becoming highly attractive acquisition targets. This trend aligns with a broader industry movement towards differentiation, where firms seek to stand out by offering tailored services that address the unique needs of highly focused client groups.
This trend provides a clear path to differentiation in an increasingly crowded market. By focusing on a niche and developing specialized expertise, you can create a unique value proposition that not only attracts new clients and drives growth but also makes your firm a more attractive M&A target for larger firms looking to expand their service offerings.
- The Entry of Long-Life Capital Partners: A Game Changer in Wealth Management M&A
‘Long-Life Capital Partners’ are new and increasingly significant M&A players quickly reshaping the wealth management industry's dynamics. Rather than short-term profits, these long-term, patient capital investors are more focused on sustained, strategic growth over decades. It’s an approach that adds a new, more durable dimension and may align well with your firm’s need for stability and support in weathering market cycles.
Notably, Fisher Investments (one of the world’s most prominent independent investment advisors) recently attracted a substantial investment from the Abu Dhabi Investment Authority. This is a clear indicator of the allure of established wealth management firms to sovereign wealth and long-term capital investors. This partnership underscores the value of aligning with investors who aren’t just seeking quick returns but are committed to the long-term growth and success of their investments.
Similarly, Sammons Financial Group's acquisition of Rob Nelson’s NorthRock Partners, an insurance holding company known for its long-term capital approach, further proves that firms focusing on legacy and sustained client relationships are becoming prime targets for long-life capital partners. It signals a shift in the M&A landscape, where firms demonstrating long-term value and stability are increasingly attractive to patient capital investors.
All of these trends are combining to reshape the industry, making it more competitive and complex. Understanding these dynamics will be crucial for long-term success and sustainability.
Whether you’re looking to grow your firm through acquisitions, considering selling, or simply aiming to remain competitive, you must stay informed about these evolving trends. By aligning your business strategy with them (e.g., focusing on strategic fit, investing in technology, and considering market specialization), you’ll be able to better position your firm to take advantage of new opportunities.
Strategic, well-planned M&A activity will continue to shape the future of wealth management. The challenge is to survive in this environment and thrive – by understanding and capitalizing on these critical trends.
Coaching Questions
Here are five open-ended coaching questions to discuss with your leadership team:
- How do you see the trend of mega deals in wealth management affecting your firm’s long-term strategy? And how will your firm continue to grow its enterprise value while these mega deals drive up multiples? What steps could you take to position your firm effectively in this evolving landscape?
- With private equity becoming increasingly dominant in the M&A space, what opportunities or challenges do you foresee for your firm? How might you leverage or mitigate these dynamics to your advantage?
- Given the rising importance of technology integration in M&A, how do you assess your firm's technological capabilities? What investments or improvements could enhance your firm’s attractiveness to potential acquirers?
- How might your firm identify and capitalize on specific niches as the wealth management industry shifts towards specialization and niche markets? How can you develop expertise that differentiates your firm and creates long-term value?
- How could we improve our organic growth strategy, regardless of the M&A movement in wealth management?
1 Fidelity Wealth Management M&A Transaction Report, July 2024
2 RIA Deal Book Q2 2024, DeVoe & Company
3 Q2 2024 M&A Deal Report, Echelon Partners
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