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How Key Drivers of RIA Consolidation Are Affecting M&A

BY Adrian johnstone
Practifi

With 67+ RIA deals announced in Q1 and Q2 2022, markets are markedly shifting. The “crypto-bubble” may have finally burst and inflation continues to rise but RIA consolidations seem to be reaching all-time highs. Markets become complex and this drives firms to consolidate. In a bear market especially, only the biggest or boldest will survive and we’re seeing a lot of enterprises fold as inflation moves. 

But why are RIA firms nearly half of all deals? What drivers are moving M&A in this market? Read on to learn more. 

Scale

Running an RIA is getting more and more complicated these days, right down to the fact that one person can tweet and set market trends. Scale is one of the biggest drivers in these RIA deals; the firm wants to preserve its core function of wealth management, so usually, the first things to go include admin, marketing, and compliance. A smaller firm might struggle to compete with bigger ones when they’re trying to grow as aggressively as someone who has a larger engine or higher number of staff. These smaller firms want to focus on what they do best – building wealth. Operating lean is more attractive for an acquisition, and it can be difficult to compete when you have larger RIAs eating up the smaller ones. Smaller firms are needing to get out or be bought out by bigger ones. This leads us to: 

Access to new clientele

Smaller firms tend to lean into more niche investments, especially when it comes to geographics. A small firm in a city that a larger RIA doesn’t have access to will buy out or merge a smaller one rather than trying to compete with them. Beyond location, demographics and investment type might be appealing to a larger firm looking to scale up and handle more assets. 

New customer personas not only add to the bottom line but often also add to the complexity and problem-solving for RIA teams. Say you have a band with friends; you’re the bass of the group, and your two other friends cover lead guitar and drums, but then you invite another friend to take lead vocals. The dynamic changes and less strain is put on the musicians when there’s a sole singer. 

 With new clientele, growth is guaranteed. Which means, if optimized correctly, more ROI and dollar signs on the bottom line. RIAs are seeing this trend. 

Lines of succession

The average RIA owner is in their 50s. This person has been at it for at least half of their life or more building their practice. They’re looking forward to the bliss of their twilight years, looking to get bought by someone who wants access to their accounts. A bigger firm or perhaps a competitor will respect what they have and start to make offers, and depending on the deal, internal partners may stay on while others ride into the sunset on their custom ‘59 Panhead. A good enough deal may include retaining current structures and guaranteeing employees jobs with minimal change, but what always comes out of it is a sizable sum of money for founders, and is a driving force for these kinds of mergers. Recent trends support this as the market has decidedly shifted post-pandemic.

Bringing it all together 

RIA acquisitions are up, and the economy is shifting as it needs to. Although the trend may slow down, acquisitions are still a major source of inorganic growth for firms looking to scale quickly. The key drivers we’ve covered are some of the major ones we’re seeing and firms will adjust or falter. Luckily, firms of all sizes have options to excel, especially the ones doing the acquiring. Tracking these opportunities can be challenging — that’s why we rolled out the Business Development app, a one-stop shop for successfully managing the full lifecycle of M&A and other inorganic growth activities. 

 To learn more, book some time with a member of our team today. 

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