Ultra-rich boom fuels M&A frenzy for advisory firms

Almost from the day he started his wealth management firm in 2014, Russ Charvonia would get unsolicited emails offering to buy the company. He’d send them directly to his trash folder. 

But like hundreds of other managers this year, Charvonia eventually took the plunge. Last month, his Ventura, California-based Channel Islands Group and its $277 million in client assets under advisement officially became part of Mariner Wealth Advisors, for an undisclosed sum.

The sale was only one of what could be a record number of acquisitions in the wealth management industry, where growing legions of rich individuals who need money advice are attracting more interest than ever. Private equity cash has been pouring in, and bigger financial services firms see an opportunity to expand by adding advisers who already have long-standing relationships with rich clients and the ability to reel in new ones. 

While the pandemic devastated large swaths of the economy and left many jobless, it also created vast new pools of wealth as central banks drove interest rates to new lows and stocks to new highs. 

The number of mergers and acquisitions involving U.S. wealth management firms is on track to potentially reach 260 this year, according to Echelon Partners, the most since the firm began tracking the data in the early 2000s.

“Covid is making wealth managers look like even more attractive investments than before,” said Pete Gougousis, managing director at consulting firm Alvarez & Marsal Transaction Advisory. “I haven’t seen a busier deal market in the last 15 years.”

The competition for takeovers has been so keen that Rhode Island-based regional bank Citizens Financial Group Inc. has begun contacting wealth firms and attempting to negotiate with their principals directly as a way of avoiding a lengthy bidding process, according to Chief Executive Bruce Van Saun.

“People know that we have an interest in growing there, but that space is heavily sought after by players who can pay up, like PE firms,” Van Saun said in an interview this week. 

Eight of the 10 largest U.S. wealth management deals in the second quarter were direct investments by private equity firms or acquisitions by companies backed by a private equity partner, according to a recent Echelon Partners report. Buyers this year include Warburg Pincus, the Pritzker Organization and Bain Capital.

ATTRACTIVE PROPOSITION

The relationship between a financial adviser and client can last decades. That’s an attractive proposition for buyout firms on the hunt for long-term sources of revenue to lock in as the pandemic continues to roil markets. 

A potentially more fundamental reason: The ranks of wealthy people are growing rapidly, while the number of professionals to advise them isn’t keeping up. 

In June, Credit Suisse Group’s global wealth report predicted that the number of millionaires globally would increase by almost 50% over the next five years, to 84 million, from 56.1 million at the end of 2020. Meanwhile the number of personal financial advisers in the U.S. is expected to grow by just 5% from 2020 to 2030, according to the Bureau of Labor Statistics. That compares with a projected 8% growth for all occupations. 

“There are simply not enough new advisers coming in,” said Marina Shtyrkov, an associate director at consulting firm Cerulli Associates. “That’s causing a sense of urgency.” 

‘FELL SWOOP’

The growing shortfall has changed how financial advisory firms think about growth, experts said. Rather than trying to hire advisers from a limited pool of new recruits, many are finding it easier to simply buy existing firms and make the advisers their own.

Doing so presents “an opportunity to increase the number of financial advisers in one fell swoop,” said Devin Ryan, who analyzes the wealth management industry at JMP Securities.

Some firms have embarked on full-fledged buying sprees. 

Canadian wealth manager CI Financial Corp. has bought about 20 advisory firms since entering the U.S. market last year, tripling its wealth-management assets to $128.5 billion in the 12 months ended June 30, according to company filings. Its latest acquisition was San Francisco-based Portola Partners, which specializes in advising ultra-high-net-worth technology founders, executives and venture capitalists. 

Since July, Mariner Wealth Advisors has made five other acquisitions in addition to the Channel Islands deal, adding $7 billion in assets under management, the Overland Park, Kansas-based firm said Thursday in a statement.

A big driver of deals, advisers say, is the so-called succession crisis spreading through the industry. 

The owners of independent advisers and their rank-and-file employees are growing older, leaving a limited pool of potential successors. The soaring valuations of their firms during the Covid era offer a prime opportunity to sell while leaving the business in stable hands. 

“The average age of an adviser is 51,” Cerulli Associates’s Shtyrkov said. “The pandemic was a wake-up call for them. They started to ask themselves, ‘How long do I want to keep doing this?’” 

[More: The hunt for mega RIAs]