Business is booming.

Convergence Dominates the Financial Advisor M&A Market


Despite unprecedented rising interest rates and increased cost of capital, the demand for financial advisors, especially retirement plan advisors, continues as the promise of the convergence of wealth, retirement and benefits at the workplace keeps PE firms interested. The Q2 2023 Wise Rhino Group report observes that for those that have achieved scale, the goal is integration, while other Aggregators still strive for scale.

But as Ascensus CEO David Musto quipped recently at an industry conference, “Scale is bullsh*t. Size alone is meaningless in the absence of the benefits.”

RPA M&A deals started heating up in 2017, with eight deals growing to 74 last year compared to 96 RIA deals in ’17 and 273 in ’22. With an estimated 13,000 RPA specialists (defined by Cerulli as those with 50% or more of their revenue from defined contribution plans) and a total of 288,000 active financial advisors, the RPA deal market is six times more active, relatively. RPA valuations remain high at almost 11x EBITDA, but with less cash up front. There are an average of eight buyers for each deal, but according to Dick Darian, WRG’s founder and CEO, the buyers may vary by transaction.

The hope and promise of serving and monetizing participants is driving interest in RPAs, as plan sponsors are increasingly open to allowing and even asking providers and advisors to offer employees wealth and benefit guidance and advice. And while there is growing competition between record keepers, RPAs and RIAs, the CEO of a top three DC recordkeeper that provides wealth services, noted that a 1% conversion rate would be a homerun leaving plenty of opportunities for advisors. A leading consulting firm said that a growing number of PE firms, including some sovereign funds, are interested in the RPA market based on a 1% conversion opportunity.

The handful of scaled RPA firms are focused on integration and wealth, while the others continue to climb that mountain. Darian stated, “RPA Aggregators may need to bring in professional managers to build and execute.” CAPTRUST CEO Fielding Miller added, “The most important advantage of scaling is the ability to attract the best talent.”

WRG estimates that there currently are almost 100 RPA buyers including:

  • Current RPA aggregators;
  • Emerging RPA aggregators;
  • RIA aggregators;
  • Broker dealers;
  • Private equity; and
  • Strategic buyers.

RIA Aggregators are just starting to pay more attention to DC plans and RPA firms, led by Creative Planning’s acquisition of Lockton’s retirement advisory division late 2021 and most recently Carson Group’s purchase of Northwest Management.

As more RPAs at scale start to effectively leverage participants, it becomes harder for independents to compete, noted Darian. Though many of the larger RPA firms already have been acquired, Darian observed that there are still 50 groups with at least $5 million in revenue and another 1,000 attractive targets who chose to sit out the first wave.

RPAs and RIAs are squarely in the second of four stages of consolidation outlined in a 2002 Harvard Business Review article “The Consolidation Curve,” by A.T. Kearny consultants, that studied 1,345 mergers in various industries.

During Stage 2 (Scale), major players emerge rapidly buying up competitors, with the top three players enjoying 15-45% market share honing integration skills, core culture, retention and a scalable IT platform. In Stage 3 (Focus) survivors look to expand their core businesses to aggressively outgrow their competition, with the market share of the top three (out of 5-12 overall players) growing to 35-70%. This stage includes megadeals and large-scale plays as survivors ruthlessly attack underperformers, especially start-ups. Profit is key, as is avoiding all-out assaults on other major players.

Record keepers are in the midst of stage 3, with five dominant 401(k) record keepers and 10-12 significant competitors. When RPA aggregators start buying up other aggregators, it is a sign that they have entered the next stage.

Convergence traditionally refers to offering wealth, retirement and benefit advice and services at the workplace or the convergence of the ideas and practices from the institutional market to the retail sector while figuring out how to sell and service the exploding micro and start-up market.

But it also could mean the convergence of record keepers, advisors and asset managers businesses. Those closest to the client have the most power, but asset managers, who are furthest away, have the greatest margins. Record keepers have and will continue to look to offer advisory services to participants as well as proprietary and co-created investments. Advisors are leveraging investment products to boost revenue while partnering with fintechs like Vestwell and leveraging PEPs to offer outsourced record keeping services to clients.

As RPA firms grow, they not only become more attractive to PE firms and RIA aggregators, they may also become targets of record keepers. Stage 2 of the consolidation curve is just preparation for the real war in Stage 3 before culminating in the fourth and final stage (Balance & Alliance) when the top three entities, with 70-90% market share, focus on forming alliances as growth becomes more challenging.

The stakes are getting higher for RPAs. The competition is tougher with new competitors emerging. Only a few will have the talent, capital and capabilities to prevail.



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