Mergers and acquisitions in the wealth management industry were strong in 2024 and will likely improve in 2025. There are several reasons for this, including:
- Demographics, particularly that many wealth managers are getting older and looking for a way to monetize their practices.
- Relatively lower interest rates make using debt less costly to acquire wealth management firms.
- Private equity-backed aggregators are looking for higher returns by combining and growing wealth management firms.
As a wealth manager who is considering selling a piece of or all of your wealth management firm, this scenario can work out exceptionally well or much less so. A lot depends on your motivation for selling. The wealth management business model is well-conceived, time-tested and very profitable.
Many buyers and sellers of wealth management firms are likely to thrive, ensuring their clients receive excellent care. However, after the initial euphoria of the merger subsides, numerous buyers and sellers risk finding themselves with little more than a sock puppet equivalent. Great hype can distract from the fundamentals that support a business.
Why Buy Or Sell
Exhibit 1 provides several reasons for buying or selling a wealth management practice. The motivations to do either tend to overlap considerably. Moreover, the logic supporting these reasons is solid. The complication on both sides is that the combined entities’ ability to achieve increasingly lofty valuations is becoming increasingly difficult.
Exhibit 1: Why Buy Or Sell
|
Reason |
Buyers |
Sellers |
| Grow a wealth management practice. |
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| Increase capabilities to serve clients better as the acquired wealth management firms lack particular expertise. |
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√ |
| Expand geographic reach as buying an existing wealth management firm in another jurisdiction is often easier than building one. |
√ |
√ |
| Leverage infrastructure to reduce costs, resulting in greater profitability. |
√ |
√ |
| Create a more prominent wealth management firm to attain a higher multiple when it’s sold. |
√ |
√ |
| Provides a way to monetize a wealth management practice where no viable successor exists. |
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The Answer Is Organic Growth
Unless you are a seller and are doing so to exit, the ability of the acquiring wealth management firm to grow organically is essential.
In a survey of 311 RIAs that sold their practices to other firms, including RIA aggregators, 70% sold so they could grow their practices (Exhibit 2). Of the 214 RIAs who sold, half were dissatisfied with the outcomes (Exhibit 3). While the acquirers talk to you about how they have the resources and methods to help you grow your RIA in their communications collateral, most fall painfully short in helping you succeed at the field level.
For acquirers, unless you aim to flip the more prominent wealth management firm relatively quickly, the combined entity must demonstrate that combining was wise. Again, organic growth is essential. There is only so much you can do to reduce overhead, and these reductions rarely compensate for high acquisition costs.
To achieve expectations, buyers and sellers must always specify how organic growth will be achieved. Exhibit 4 identifies some of the established ways to generate significant organic growth.
Exhibit 4: Generating Significant Organic Growth
|
Organic Growth Strategy |
Tactical Approaches |
| More business with current clients | • How to Capitalize on the Great Wealth Transfer |
| Generating new clients | • How Advisors Can Quadruple Client Referrals |
| Building a steady stream of new clients | • The Best Approach to Getting Accountant Referrals |
Buying or selling a wealth management practice can be a brilliant decision, especially considering the valuations and the potential. However, to justify the valuations, substantial organic growth is critical.