RIA merger and acquisition activity achieved another milestone in 2021, surpassing 200 transactions in a calendar year for the first time, according to David DeVoe, CEO and founder of the research firm DeVoe & Co.
2021 marks the eighth successive record year for RIA M&A activity, and the same is expected for 2022. But DeVoe told ThinkAdvisor we shouldn't necessarily expect the 30%-50% growth in the number of M&A transactions we've seen in recent years.
He and three other industry executives ThinkAdvisor recently interviewed all predicted continued RIA sector consolidation.
Below are their projections for the sector in 2022, along with their thoughts on other trends.
Rudy Adolf, CEO, chairman and founder of Focus Financial
"It was a very good year" for RIAs in 2021, according to Rudy Adolf, CEO, chairman and founder of Focus Financial, noting it was another record year with increased M&A activity.
What "gets lost," however, is that "this industry is still under-consolidated," he argued. Noting there were over 200 deals in 2021, he said: "From my perspective, this industry should be doing 300, if not 400, transactions."
This is about a $6 trillion industry and is expected to grow to $9 trillion, growing about 10% a year, Adolf said. There will probably be $3 trillion "in motion in the next five to seven years," not the 10 years some expect, he added.
He predicts M&A activity in the U.S. and beyond will continue growing, probably at an accelerated pace.
Peter Mallouk, CEO and president of Creative Planning
From August through October this year, "we saw a huge number" of new RIA firms come to market for reasons that included a fear the tax rate was going to rise, according to Peter Mallouk, CEO and president of Creative Planning.
A growing number of RIA firms are also coming to market because "valuations have expanded, sellers are getting older, [and] pricing has gotten too high to do internal successions," he said.
Advisory firm owners are also "a little concerned about big competitors in their backyard that are starting to show up," Mallouk added.
Those factors are "going to drive a five-year consolidation in the space" in which the number of M&A transactions will grow, he predicted.
"Whether or not there are tax changes, I think there's just this awareness that the tax rates are probably never going to be better, so they can only move against a seller," he said.
One significant issue that is changing going into 2022: "Before, you can be in a city in America and it's you and like a hundred other firms, but now you're starting to see the five big names … showing up in every town," according to the executive. "And they're all going to get bigger" in those markets, he predicted.
Advisory firm owners are asking themselves how they can compete with the major players, Mallouk said. His prediction: "There will be people that are going to successfully compete, but you're going to have to make decisions to be able to do so in the future. …. Some people won't be able to make those investments, and some will."
Meanwhile, "most of the big firms have a huge amount of leverage tied to them, and it will work out wonderfully if the market continues to go up," he said.
But Mallouk warned: "If we have a prolonged bear market, with an emphasis on the word prolonged, not like the pandemic" that lasted only "a couple of months," things won't go so well for those large players, because "the space is much more fragile than it appears."
Things will "go really well if bear markets are short-lived, but if we have an '08-'09-type scenario or anything like that, we would see, for the first time, the collapse of a major player," he predicted.
On the tech front, the Creative Planning executive said: "I think somebody is eventually going to have to create technology that really goes across trading and reporting and CRM and that's really functional."
