This year is poised to usher in a number of changes within the wealth management industry – some inconsequential, others impactful, most somewhere in between. For example, industry-wide concerns, including the demographics-driven shortage of advisors and increased demand for advice resulting from the Great Wealth Transfer, will give rise to innovative solutions that deliver personalization at scale.
Many things will remain the same, such as the outsized role private equity continues to play within the RIA M&A space (within a strong macroeconomic ecosystem, it could surpass last year’s impressive numbers). However, I do anticipate a shift in PE’s approach to dealmaking. The nature of consolidation in our industry is changing.
2024’s robust M&A activity was in line with my previous assertion that we are in the earlier innings of a period of consolidation within wealth management. I believe this era will continue for the next decade or so. Existing buyers continue to build their share of the market, and new buyers are entering the space looking to make their mark and earn hefty ROIs.
But in the coming year, I believe both sets of suitors will move away from the “bigger is better” mantra that, for too long, has informed the actions of our industry’s M&A movers and shakers. Advisors looking to sell, monetize or partner with acquirers to take advantage of lucrative deals that are out there (currently 8x,10x,12x times EBITDA or more) will find they must bring more to the table besides size. Historical growth—net of the market—will be how buyers gauge the value of a firm.
Growth prospects drive interest for PE firms. In 2025, we’re likely to see more selectivity, with strategic buyers increasingly less interested in firms with no proven history of net new asset growth, no matter their current size. Plenty of deals are in play, but buyers are being more judicious before opening their wallets.
Established buyers will increasingly walk away from the negotiation table without the right growth numbers. Newer buyers in the marketplace, those seeking to build their reputation, will tend to be more flexible and consider slower-growth firms. Still, their offers may not be what sellers are expecting. While top-tier firms will continue to demand and receive a premium, sellers with less-than-stellar growth rates and no strategic plans to turn them around may need to rethink their pricing expectations.
Go-forward success belongs to those who grow the most and the fastest. The historical M&A model took a top-down approach, with buyers investing in their new addition to spur growth. The new trend is toward a balanced model incorporating a top-down and bottom-up approach to growth.
If a firm with a great history of growth buys a firm that already has a great track record of growth, it’s a “1+1 = 3” formula for synergy and scale. Sellers coming to market with firms with a propensity for and track record of growth will grow faster within the buyer’s business model. They offer not only assets but advisors who can continue to grow the business.
Ultimately, something is worth what people are willing to pay … and buyers will not be as inclined to put a premium on size alone. In other words, bigger is better only when growth is good.
Jeff Nash is the Chief Executive Officer and Co-Founder of Bridgemark Strategies.