State of the Rates: Why M&A in the Wealth Management Industry Has Remained Resilient

Wealth Management Midyear Outlook

By Katie Bruner & Aaron Halser

Featured in Wealth's 2023 Midyear Outlook

Following a decade-long period of historically low interest rates, the Federal Reserve embarked on a campaign to combat rampant inflation in the spring of 2022. The central bank subsequently initiated a series of 10 consecutive hikes, raising the federal funds rate from near zero to 5.25 percent as of early June 2023. A host of factors associated with the COVID-19 pandemic contributed to the spike in inflation, including supply chain issues, an injection of liquidity to stimulate the global economy and pent-up consumer demand.

Despite broad concerns over the potential impact of higher borrowing costs on consumers and businesses, the wealth management sector continues to experience robust merger and acquisition (M&A) activity. While we anticipate another couple of rate hikes over the second half of the year due to strong economic data, expectations remain the same for wealth managers in terms of resiliency – regardless of any interest rate headwinds. Let’s examine the factors driving the industry’s strength.

Influx of capital

Investors of all stripes, flush with capital, have increasingly recognized the potential within the wealth management sector, leading to a surge in investments and acquisitions. These parties have injected significant capital into the industry, enabling wealth management firms to bolster their operations, enhance technological capabilities and expand their client base. This engagement has not only provided additional financial resources but also strategic guidance in some cases, contributing to the continued growth and consolidation of the wealth management landscape.

Strategic acquisitions

Wealth managers have actively pursued strategic acquisitions as a means to drive growth, lending another pillar of support to the industry. In 2022, the registered investment adviser (RIA) industry witnessed an impressive 11.1 percent increase in deal volume, setting a new record. This surge was primarily propelled by consolidators, accounting for nearly half (43 percent) of all deals. Through strategic acquisitions, firms have been able to diversify their revenue streams, expand their offerings and enter new verticals. Additionally, these acquisitions provide access to previously untapped client segments, fueling firms’ growth trajectory and opening doors to new markets.

The wealth management industry continues to grapple with fee compression, as competition intensifies and regulatory scrutiny grows while low-cost automated platforms gain prominence. To tackle this challenge, strategic acquisitions provide opportunities for wealth management firms to benefit from economies of scale and cross-selling potentials, ultimately enhancing profitability. By streamlining operations and capitalizing on synergies, firms can mitigate the impact of fee compression, ensuring value delivery to clients while maintaining healthy profit margins.

Expansion of geographical footprint

Many RIA practices are entering new geographies to target regions with favorable market conditions, economic growth prospects and/or high-net-worth populations. A notable shift is underway as firms focus on expansion in cities with National Football League teams and midmarket areas such as Cleveland, OH. This move away from traditional M&A centers such as New York, California or Texas highlights emerging trends that are reshaping the sector. Firms are seizing the opportunity to broaden their client base and tap new revenue streams.

Interest rates be damned

Despite a rising interest rate environment, the wealth management industry continues to demonstrate resilience via robust M&A activity. An influx of capital, strategic acquisitions and expansion opportunities for RIAs will serve as strong pillars, supporting the growth of the wealth management sector throughout the rest of the year and into 2023. Regardless of the Federal Reserve’s decisions on interest rates, the sector is poised for sustained momentum.

View the original article by Katie Bruner & Aaron Hasler published in's 2023 Midyear Outlook here:

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