These Factors Are Driving M&A In The Wealth Management Industry

The number of mergers and acquisitions involving U.S. wealth management firms has risen steadily since 2017, and several forces currently at work have created a “virtuous circle” of M&A activity that should keep the momentum going, according to Piper Sandler & Co., a registered broker-dealer that lays claim to completing 80-plus transactions in the asset/wealth management sector encompassing more than $50 billion in total transaction value.

In a recent report from the firm’s asset management investment banking group, the Minneapolis-based company said deal volume has surged in large part because more buyers—many of them backed by private equity sponsors—want a piece of the wealth management space.

“While private equity sponsors have historically been investors in the space, the number of private equity firms with significant scale ambitions has never been greater—both as acquirers of larger, platform businesses as their entry point into the sector and follow-on acquisitions to further scale those platforms,” Piper Sandler said in its “Wealth Management: The Deal Magnet” report.

The report noted that platform transactions by private equity sponsors represented 55% of total deal activity in 2018 and 2019.

Independently owned wealth management firms are the next most-active dealmakers for wealth management firms, accounting for roughly 20% of the deal volume during the past two years. So-called strategic buyers, which Piper Sandler says includes banks, broker-dealers, traditional asset managers and insurance companies, play a smaller role in the M&A market because “they have found themselves frequently outbid in the high-flying market,” the report said.

According to Piper Sandler, the number of M&A deals involving wealth management firms jumped from 57 in 2017 to 78 the following year to 123 in 2019. There were 55 deals in this year’s first half representing $169 billion in transacted assets under management. (Oddly, last year’s transacted AUM of $251 billion was 41% less than in 2018, even though deal volume was almost 58% greater in 2019 versus 2018.)

Wealth management is a lucrative business with favorable attributes to would-be acquirers, and among them is the growing client base of high-net-worth individuals with expanding personal wealth. And that growth is supported by existing client referrals and relationships with local centers of influence. In addition, clients of wealth management tend to be sticky, resulting in client retention rates above 90%.

The report identified several factors that are fueling the M&A consolidation trend:

• Advisor demographics. The graying of the wealth management space, and the accompanying need for succession planning, is a big driver of M&A activity. Piper Sandler said 62% of RIAs are still led by their founders; the average age of financial advisors is 55 years; and about 20% of advisors are 65 or older. Add it up, and roughly one-third of advisors plan to retire in the next 10 years, potentially leaving the clients up in the air.

The report cited research from the valuation and consulting firm DeVoe & Company showing that the leadership transition from founders to the next generation will be challenging.

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