Recent trends in the Registered Investment Advisor (RIA) sector point to smaller advisory practices playing increasingly significant roles in mergers and acquisitions, as highlighted in the latest DeVoe & Company report.
This investment banking and advisory firm, which closely monitors M&A activities within the industry, noted a slight 3% rise in transactions, totaling 65 in the first quarter of 2024, compared to the same period in 2023.
Private equity's involvement has notably surged, accounting for 15% of the advisor transactions this year—a substantial jump from previous years. This shift is reflective of broader changes in the market dynamics and investment strategies within the sector.
Despite a downturn in advisor transactions last year—the first in almost a decade—the recent quarters have shown recovery signs. DeVoe projects a rebound in the number of transactions throughout 2024, surpassing the figures from 2023. This forecast stems partly from the aging demographics at smaller firms, where fewer than 20% of leaders believe younger advisors are financially capable of internal buyouts, a stark decrease from 39% in 2020. Such insights predict an uptick in external sales moving forward.
Challenges in succession planning continue to pose significant concerns, prompting many RIAs to consider selling their practices. DeVoe's analysis suggests that this issue will likely drive more sales as firm founders find it increasingly difficult to facilitate internal transitions.
The majority of sellers in early 2024—71%, to be precise—were firms managing under $1 billion in assets, marking a 7% increase from the previous year. Specifically, firms with assets between $100 million and $500 million dominated the scene, representing 54% of all transactions DeVoe tracked during the period. Notably, DeVoe's reports exclude sales from firms managing less than $100 million. The average AUM of sellers remained steady at about $827 million, consistent with past years.
The motivation behind these sales extends beyond mere liquidity needs. Many smaller firms are merging with larger entities to leverage their operational capabilities, accelerate growth, and enhance client services. Others view external sales as a strategic move for succession planning.
Interestingly, there is a growing interest among sellers to partner with other RIAs instead of large national aggregators, which have been the main players in recent acquisition trends. Although these consolidators still represent a significant portion of RIA deals, their share has gradually declined from a peak of 54% in 2021 to 43% in early 2024. This shift suggests a strategic pullback by consolidators, likely driven by a need to manage debt ratios and mitigate risks amid a high-interest-rate environment.
For advisors contemplating a sale, partnering with another RIA offers an appealing alternative. This route not only promises a more significant role in the merged entity's future but also provides a sense of security and inclusion that may be lacking in deals with larger consolidators. Many advisors express that selling to another RIA allows them to maintain influence over strategic decisions, contrasting with fears of being sidelined in the structures of larger acquiring firms.
In summary, the RIA sector is undergoing notable transformations, with smaller practices and private equity playing crucial roles in shaping the landscape of mergers and acquisitions. As the industry continues to evolve, these trends offer valuable insights for advisors considering the future of their practices in an increasingly competitive market.
