The advisory industry is
consolidating, and firms that think they might want to do something at some
point should explore their options
May
29, 2019 @ 10:40 am By Scott Hanson
Even if you've
never thought about selling your financial planning firm or practice before,
now's the time to familiarize yourself with the landscape.
Just look at what's
going on in our industry: Goldman Sachs is buying United Capital. Ric
Edelman, the Mutual Fund Store and Financial
Engines have all been purchased and rolled into one
megafirm. Focus Financial is
now a publicly traded company. And almost every day, I read about another
small registered investment adviser joining
a larger one.
Our industry is
consolidating, and fast.
If you've been
watching from the sidelines and thinking you might want to do something at some
point, there are three good reasons to explore your options right now.
First, it's a
seller's market. Not only are many firms getting large percentages of their
asking prices in cash, but investment advisory firms (along with hybrid
advisory practices) are receiving highly agreeable terms.
Case in point: It's
been reported that United Capital sold for over 17 times EBITDA (earnings
before interest, taxes, depreciation and amortization). Obviously, the typical
advisory firm won't trade for that kind of multiple, but the valuations today
are much higher than a few years ago, and it's certainly not uncommon to see
firms trading at two to three times revenue.
Second, there's a
ton of cash out there waiting to be invested in the advisory business. Private equity is
now a huge player in
the space. That has not only brought in lots of capital, it has resulted in
fierce competition for deals. For every purchase you read about in which PE was
the buyer, there were five other firms that also wanted the deal. (We ourselves
recently entered into an arrangement with capital from private equity.)
And as the Goldman
Sachs-United Capital deal demonstrates, large, national firms are making noise
in this space. My guess is that in the very near future, you'll see other
national firms enter the fray.
Lastly, the sad
fact of the matter is that most investment advisory firms aren't even growing.
(And most don't know it.) There are numerous reasons for the stagnation, but
among them is that it's difficult to grow an established firm once an adviser
reaches capacity.
Other factors are
that founders no longer have time to go out and drum up new business, baby
boomers are retiring in record numbers (and need their money to live), members
of our disproportionately large, wealthy but elderly population are dying and,
of course, clients still organically spend down their assets or move their
money elsewhere.
The simple fact is
that the average adviser who's reached capacity probably loses 5% to 6% of his
or her assets each year but has been blinded to this fact by the long bull
market.
Of course, not
everyone should sell. But everyone in the advisory space who's worked hard and
run a tight ship should at least dip a toe in the water and see what the
marketplace has to offer. Whether you sell, stay put or even swap shares with a
growing firm, in my 26 years as a principal, I've never seen a sellers' market
quite like this.
Scott Hanson is co-founder of Allworth Financial, formerly Hanson
McClain Advisors, a fee-based RIA with over $4 billion in AUM.
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