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Advisors’ Interest in M&A High, But Strategy Needs Focus

Industry Trends and Research

Financial advisors and RIAs apparently have strong interests in pursuing M&A deals, yet need to focus on developing their strategies around M&A, succession and post-transaction integration, a new study finds. 

Data from Dimensional Fund Advisors’ 2020 Global Advisor Study reveals that nearly half of the surveyed firms indicate they would like to execute a merger or acquisition over the next 24 months, with most of those firms indicating interests in acquiring. The study also found, however, that more than 80% of firms lack a defined M&A strategy. 

The findings are based on aggregated 2020 data from nearly 1,000 independent advisory firms globally with $368 billion in combined assets under management (AUM). Among the firms that are actively considering M&A, the top four responses indicated that:

  • 31% want to acquire a firm;
  • 21% want to acquire a team; 
  • 9% want to merge; and 
  • 7% want to be acquired.

Dimensional also found that 62% of respondents have been contacted by firms interested in a merger or acquisition, but only 3% of this subset moved forward with a deal.

A majority (60%) of the reported transactions occurred among firms with less than $50 million in AUM, reflecting an ongoing focus on partnering with larger, more mature firms to pursue continued growth and solve for succession, the study notes. 

M&A Breakdown

The most common reasons participants cited for their interests in M&A activity include:

  • increasing the value of their businesses; 
  • improving economies of scale; improving cashflows/profits; and 
  • acquiring human capital.

The most common deal-breakers reported in a sale or acquisition were lack of investment philosophy alignment (83%) and firm culture fit (82%), Dimensional notes.

When a deal is ready to finalize, however, the average timeframe from signing a letter of intent to executing the deal agreement is less than three months. This may reflect acquirers becoming more precise with their offerings and sellers having a clearer set of goals and deal-breakers, the study observes. 

Among the fastest-growing firms in the study, acquisition accounted for 20% of new client households and 30% of AUM growth.

“As we heard from industry experts and seasoned acquirers in attendance at Dimensional’s recent Deals & Succession Conference, buyers are looking for evidence of strong organic growth in the firms they are targeting for acquisition,” notes Catherine Williams, Dimensional’s Head of Practice Management. “Likewise, sellers want to understand how the acquiring firm will enhance services to clients and further their growth objectives.”

Succession Planning

The recent conference and study results also indicated advisors’ and RIAs’ ongoing focus on finding an internal succession solution, Dimensional further notes. According to the study, the biggest challenges that firms face when implementing a succession plan are identifying a successor (49%) followed by agreeing on a time frame for implementation of the plan (28%). 

With talent acquisition among the top five reasons for buying another advisory business, some firms are turning to an acquisition strategy to find potential next-generation talent who may provide a succession solution, notes Dimensional.

The study found that only 44% of firms have a succession strategy in place—which the firm notes is an improved percentage over prior annual studies, but indicative that many firms are still grappling with developing a comprehensive plan.

Of the firms that have a documented succession plan, 46% are looking to execute their plans within the next 10 years. When looking specifically at the succession timelines of sole practitioners, the study indicated that 43% plan to exit in five years or less.