401(k) adviser M&A doubles last year’s record

There were a record number of deals in the retirement adviser market last year, but those figures have been completely eclipsed by M&A in 2021.

There have been at least 62 mergers and acquisitions for retirement adviser firms so far this year, nearly double the 32 seen in 2020, according to a new report from M&A consultant Wise Rhino Group. It is likely there will be 70 or more total deals in that market before the end of the year, the firm wrote.

By comparison, there were 28 deals in 2019 and 17 in 2018. Prior to that, acquisitions were in the single digits, the report shows.

Behind the rapid pace of M&A is a tidal wave of private equity money, an aging population of RPA owners eager to sell and a business model that increasingly favors cross selling of retirement plan and wealth services.

What is happening in the RPA market is not different from forces in the broader financial services area, said Dick Darian, founding partner at Wise Rhino.

“The power is moving to those with the client relationships,” Darian said. “The retirement adviser has, arguably, the strongest relationship of any consultant in the C-suite.”

Private equity knows this, and that has prompted acquisitions, both directly and indirectly, he said.

That was evident from GTCR’s purchase in 2020 of a 25% stake in Captrust Financial Advisors, which valued the firm at $1.25 billion. About a year ago, Aquiline Capital Partners made a majority investment in SageView Advisory Group.

And last month, Creative Planning bought Lockton’s U.S. retirement plan business through a deal that included an equity stake in the acquiring company. While that deal itself was not a direct private-equity purchase, it followed a minority investment that PE firm General Atlantic made last year in Creative Planning.

The wave of deals has pushed up valuations to 10 to 13 times EBITDA, or earnings before interest, taxes, depreciation and amortization, Darian said. Those guaranteed prices are also accompanied by earnouts that net sellers an additional one to three times their EBITDA, he noted.

The competitive environment to buy RPA firms appears to be edging out smaller firms that in other times would be trying to grow through acquisitions. Instead, those companies are having to wait until the market cools down or look more creatively for smaller dealers that they could broker. But the market has also turned prospective buyers into sellers.

“Right now it is really difficult for an unscaled firm to compete with the aggregators on price and capabilities,” Darian said. “But that won’t be forever.”

In some cases, it’s also affected succession plans, with RPA firm owners getting much higher bids for their businesses than people who have been at their companies for years and had hoped to take over, he said.

Recently, sellers have mostly been firms with between $1 million and $5 million in revenue, with assets under advisement of $750 million to $5 billion and margins of 30% to 35%, Darian said. Conversely, buyers have ranged in size considerably, although most have been those with billions in revenue, he said.

“Some of the most talented larger firms are the ones that are actually selling,” he said. “These are the people who understand what is happening. They see the opportunity.”

The pace of deal making could continue, or even speed up. Although there have been about 180 sales over since 2006, there are far more firms that have yet to be sold.

“There are still over 650 independent retirement RIAs that could be acquired,” he said.

The post 401(k) adviser M&A doubles last year’s record appeared first on InvestmentNews.

Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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