The world of Registered Investment Advisors (RIA) mergers and acquisitions (M&A) is undergoing a significant transformation, shaped by years of competitive evolution. The impact of institutional capital, the pursuit of absolute growth, and the quest for expansive geographic reach have given rise to a new era of acquisitions that redefine how value is created for all stakeholders. The 2022 RIA Deal Room highlighted the profound influence of institutional capital, which has propelled demand and professionalization in the RIA space. This evolution has led to a heightened emphasis on distinctive operating models and effective value-creation strategies. Financial buyers, platform-driven investors, and integrators have honed their acquisition criteria, clarifying their priorities in a seller. This has ushered in the era of the systematic acquirer, one who balances short-term and long-term financial objectives by prioritizing talent, capabilities, and geographic expansion.
Concurrently, the RIA seller market has seen substantial growth over the same period. Deal volumes have surged, driven by sustained favorable conditions. RIAs seeking growth capital, liquidity, and enhanced infrastructure are entering a competitive market. While increased deal volumes make headlines, they also contribute to a more crowded field, requiring potential sellers to distinguish themselves effectively.
Business Management: The True Differentiator
The journey of RIA M&A began with a handful of acquisition brands leveraging their size advantage and access to capital to establish a foothold. Today, access to capital and size is merely the entry ticket. With more than 20 acquisition brands completing multiple transactions in 2021, the competitive landscape has evolved. It has shifted toward advanced business management practices that enhance the client experience, transcending traditional quantitative metrics. Success in RIA M&A now hinges less on numerical benchmarks and more on three pivotal areas of business management:
- Talent: The capacity to identify, engage, and retain next-generation talent by offering a compelling blend of career growth, compensation, and ownership opportunities.
- Infrastructure: A demonstrated commitment to investing in management, technology, and process improvement infrastructure.
- Services and Channel Penetration: A proven track record of expanding end-investor service offerings or accessing unique end-investor channels.
These three facets of business management primarily revolve around the concept of a buyer or seller contributing tangible, organic growth, efficiency, and capacity to another organization. Moreover, they serve as concrete means of distinguishing an RIA’s story in the marketplace, differentiating it from the competition.
Buyers: Systematize Your Story or Yield the Floor
The 2022 RIA Deal Room research revealed that nearly all surveyed buyers intended to make as many acquisitions as in previous years. Buyers adopting a systematic approach are likely to remain active. These firms are more inclined to focus on deal structure and growth sharing as mechanisms for mitigating risks while executing their business plans. Deal structures in recent years have reflected a pursuit of certainty, driven by competition, low-cost capital, and favorable market conditions. The foreseeable future may witness a return to more balanced deal structures, with shared risks.
However, the competitive M&A landscape demands that buyers distinguish themselves. People, processes, and growth prospects take center stage in their messaging. Systematic integrators highlight their depth in business management to secure acquisition opportunities. These platforms showcase how they have implemented compensation structures, benefits, technology enhancements, expanded services, and operational improvements. By doing so, they demonstrate to potential sellers how they can “fast-track” their integration and avoid substantial time and capital investments. Any firm aspiring to be more than an opportunistic buyer must internalize this approach and systematize its narrative to remain competitive in the evolving market.
Sellers: Fortify Your Positioning or Accept Average Outcomes
The growing supply of sellers is evident in the consistent increase in RIA transactions. According to Fidelity Investments, there were 215 RIA transactions in 2021, up from 131 in 2020. While this figure may be conservative due to unreported transactions, it underscores a rising interest in selling or merging among RIA firms. Succession planning, management fatigue, and growth avenues are all factors propelling RIAs into the market. These drivers are relatively immune to market fluctuations, suggesting that the pool of available sellers is poised to expand or at least remain stable.
In this environment, the challenge for sellers lies in differentiating themselves from the multitude of firms attracting acquisition brands. What sets your firm apart from dozens of others under evaluation by potential buyers? With buyer demand potentially plateauing or becoming more measured in the current market, differentiation becomes paramount for achieving optimal outcomes. This differentiation must stem from a combination of next-generation talent, specialized services, or unique access to growth channels.
The heightened demand among buyers and the increased supply among sellers underscore the vital role of business management practices. A coherent platform narrative that outlines how a wealth management firm adds value and engages with its stakeholders is essential for standing out in a crowded buyer field. These same business management practices are equally crucial for sellers, enabling them to command a premium by showcasing strong talent, unique capabilities, or distinctive growth channels. The foundation of RIA M&A has been set, and the ability to distinguish oneself in the market hinges on the quality of the narrative an RIA has crafted.
In conclusion, the world of RIA M&A is entering a dynamic phase characterized by heightened competition, evolving deal structures, and a growing pool of sellers. Business management practices have emerged as the linchpin for success in this landscape. For buyers, systematizing their approach and leveraging their business management depth are imperative. Sellers must fortify their positioning by showcasing their unique value proposition. As the RIA industry continues to evolve, the ability to stand out and offer a compelling story will be the differentiator in this highly competitive marketplace.