Page 40 - Investment Advisor June 2023

RIA leSSOnS & leADeRS

I’ve placed a number of advisors duMPInG In-House ing their intentions to branch manage-
out of one major wirehouse that push- 7 ProduCts In AdvAnCe oF ment, which can end badly.
es securities-based lending. These advisors your Move
explained to clients that they would have Every so often, I hear about advisors Mark Elzweig is head of Mark Elzweig Company,
more freedom to service accounts prop- who close out credit lines or jettison an executive recruiting firm that specializes in
erly at their new company, which really proprietary products in advance of their helping financial advisors find the right career
resonated with these investors. move. They are inadvertently telegraph- paths. Reach him at [email protected].

Has RIA Dealmaking Plateaued?
RIA merger and acquisition activity is in the doldrums, DeVoe these costs not only erode future profits but can also limit
& Co. said recently. With 63 transactions posted in the first access to additional capital or even threaten debt covenants.
quarter of 2023, m&A activity was 7% lower than the 68 Buyers are also reworking deal structures to the benefit of
transactions that marked the opening quarter of 2022 — the sellers. many firms are adding more consideration to ear-
first time since 2014 that the year has started with a weaker nouts. the new structures will enable today’s sellers to ben-
first quarter than in the previous year. the current slowdown efit from tomorrow’s expected stock market increases, which
came on the heels of the fourth quarter’s 20% decline and can ameliorate resistance to selling while the stock market is
marks the industry’s first six-month downturn since 2018. compressed, according to DeVoe.
Several factors are driving the slowdown, DeVoe reported. Increased buying activity by RIAs offset the slowdown in
the confluence of slightly compressed valuations and consolidator activity. DeVoe reported that during the last three
increased transaction expenses — brought on by a declining years, acquisitions made by RIAs have increased from 23% of
stock market and rising interest rates — and distracted sellers the market to 27% in the first quarter. RIAs’ acquisition activ-
contributed to the deceleration. Even consolidators reduced ity during the first three months of this year shot up to 17 from
their standard level of activity, with some traditional buyers just eight a year ago, or a mere 12% share of the market.
not completing transactions in the first quarter. the increase in activity among RIAs may indicate a rise of new
According to DeVoe, despite the dampening effect of these consolidators, according to DeVoe. many RIAs dip their toes into
factors, “m&A activity in the industry remains extremely an inorganic growth strategy and then dive into it with conviction.
high on a relative basis in comparison to even recent years.” Buyers in DeVoe’s “other” category acquired the remaining
DeVoe focuses on transactions of $100 million or more in 25% of sellers in the first quarter, executing 16 deals. this
assets under management. the firm limits its tracking to group includes private equity, insurance/benefit companies,
$100 million-plus RIAs to optimize the statistical accuracy of diversified financial services, broker-dealers, asset managers,
its reporting and screens out the SEC-registered hedge funds, accounting firms and, in this report, banks.
independent broker-dealers, mutual fund companies and DeVoe noted that it had previously classified banks as a sepa-
other companies that do not operate as traditional RIA firms. rate buyer category, but given their negligible activity as buyers in
Consolidators are still the dominant buyers of RIAs, not- recent years, banks have been moved to “other” as a subcategory.
withstanding the recent fall in their share of acquisitions. Small firms — those with assets between $100 million and
In DeVoe’s definition, these are companies whose business $500 million — accounted for 54% of RIA sellers in the first
models are predicated on making RIA acquisitions or are quarter, a 16 percentage point increase of share over last
active acquirers with inorganic growth as a core plank in year’s first quarter: 34 transactions versus 26. Firms in this
their business strategy. Consolidators’ share of transactions size segment often realize the greatest benefits by joining a
deflated to 48% in the first quarter from 50% for all of 2022 larger partner, DeVoe noted.
and 54% for 2021. they announced 30 transactions in the the biggest change in sellers during the first quarter
first quarter, down from 38 a year ago. involved midsize firms with assets between $501 million and
Interest rate increases indirectly contributed to consolida- $1 billion. Only four midsize firms were sold, compared with
tors’ slowdown, the report noted. these acquirers, commonly 22 in the first quarter a year ago. Firms with $1 billion to $5
backed by private equity and leveraged with debt, are affected billion in assets surged to 29% of sellers in the first quarter,
by rate increases in several ways. Higher rates increase the cost compared with 21% for all of 2022. megafirms with more than
of financing current transactions. Perhaps more important, debt $5 billion in assets represented 11% of first-quarter sellers,
service on the loans from their historical transactions balloon. nearly double their share for all of 2022. —Michael s. Fischer

38 Investment AdvIsor June 2023 | ThinkAdvisor.com