News & Analysis

Private equity firms are driving record numbers of M&A deals in wealth management as the industry seeks to consolidate amid a tough economic environment.

Wealth managers struck 341 M&A deals in 2022, an 11% increase from the previous year and at least a 10-year high, according to a report from investment bank Echelon Partners. Just about 70% of those transactions involved PE buyers or buyers backed by PE.

"There are so many buyers out there, and there's a lot of PE money in the space," said David Barton, who oversees M&A at Mercer Advisors. "They're driving the demand."

Buyers in the market include big platforms like Mercer, as well as regional wealth management companies that are using acquisitions to achieve inorganic growth. There are also PE firms targeting wealth managers to use as platforms in buy-and-build strategies. According to Echelon, three PE-backed wealth managers—Mercer Advisors, Wealth Enhancement Group and Creative Planning—were found to be the sector's most active strategic acquirers in 2022. Barton says the high demand has driven up valuations.

"We are seeing some recapture by buyers in the deal structure, such as paying less money at close or requiring a longer earn-out period, but other than that, it is a seller's market," he said.

Sellers are motivated by a combination of factors. Prolonged public market turbulence, persistent inflationary pressure and a tight labor market have hit the earnings of many wealth managers, which are paid through a proportion of assets under management, forcing many to put themselves up for auction. In addition, sellers are driven by an increased need for succession planning.

Many smaller firms have been under greater pressure and so have opted to sell to larger platforms to survive, added Barton.

"In face of the market downturn, some of the larger firms don't want to come to the market because their trailing-12-months revenues are lower," Barton said. "But smaller firms don't have the luxury. They have to find a partner now because they need to compete on services."

At the same time, wealth management clients have been increasingly looking for a one-stop shop that offers services beyond just retirement and financial planning, such as tax preparation, accounting and estate planning. Joining a larger platform will help smaller wealth managers broaden their services and gain a competitive edge by getting access to a shared talent pool of financial advisers and lower operating costs.

In 2022, the average AUM involved in each wealth management M&A transaction fell for the first time in five years, sinking from $2 billion in 2021 to around $1.6 billion in 2022. The decline is due to buyers' growing appetite for add-on deals and the shrinking AUM of wealth advisers that were acquired, according to Echelon.

Looking into 2023, the tailwinds that supported the M&A boom last year will continue to drive more dealmaking in the year ahead. Barton said his firm has already lined up five acquisitions that will bring in $2 billion in additional AUM and around 1,400 new clients. Those deals are expected to close by the end of Q2.

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