Registered investment advisory firms are getting bigger and drawing higher purchase multiples, but their growth is slowing down, according to new studies by an industry consultant.
Industry median sales prices nearly doubled, to nine times an RIA's earnings between 2017 and 2021. But slumping stocks and bonds and rising financing costs tied to interest rates could push down transaction valuations this year, according to research by Phoenix-based
Those figures explain
"Advisors should know that not making a decision on how you want to compete is a decision," Kawal said. "For maybe a period of time, you could kind of put it on autopilot and things were great. And that's not just because of the market but because of the way the industry is changing. You have to be a little bit more intentional."
Furey agreed, referencing the location of Financial Planning's offices in New York.
"Especially here, if you try to walk down the middle of the road, eventually you're going to get hit and run over," he said. "You've got to pick a lane."
The
With a portfolio of "moderate" risk losing 15% of its value in 2022, the median purchase multiple in an M&A deal climbed for the fifth straight year while growth tapered off for the fourth consecutive one, according to Advisor Growth's research.
As a ratio of price tag compared to the common measure of profitability called earnings before interest, taxes, depreciation and amortization, median EBITDA multiples swelled to 10 in 2022 from nine a year earlier and 6.6 in 2019, the firm's latest annual "
A "sluggish start" to
In fact, the RIA industry as a whole displays organic growth, or expansion that isn't the result of M&A or recruiting, of just 3%, according to Advisor Growth's other report this month, "
"Larger firms are growing faster," the report said. "For smaller firms to compete — they will have to develop a niche capability or find a leverage point from an outsourced provider or potentially find a partner through M&A."
An elite group of 33 "acquisition brands," such as Creative Planning, Mariner Wealth Advisors, Captrust, Savant, Focus Financial Partners, Hightower, Beacon Pointe Advisors, Choreo and Wealth Enhancement Group, are completing as many as 60% to 70% of the industry's M&A deals each year, Kawal noted. Advisor Growth counts more of them than ever, and they're "largely why private equity is here," because they have "written the playbook on how valuable and accretive building a great independent wealth management platform can be," he said.
"They're really changing what it means to grow, because they're putting organic, new client acquisition together with M&A and getting the best out of both of those elements," Kawal said. "They're redefining, in my opinion, what it means to be competitive in the independent space."
The smaller RIAs attempting to keep up could benefit from vendors that help them integrate the various tools and give their clients and teams the best experiences, according to Lisa Jacobs, a vice president of
"There's an opportunity to use your technology provider as more than just a vendor," Jacobs said. "You really should be able to have a true partnership with the teams that have seen the best and worst of whatever technology you're using."
Niches offer another path for the smaller RIAs to find success in a consolidating industry, according to Advisor Growth, which recommends that the advisory practices develop an "ideal client" segment or "sub-segment." Some advisory practices have found success by focusing on, say, tech company employees, business owners or executives in a particular industry, doctors, dentists, lawyers or other groups that have unifying characteristics.
Regardless, the conversation among the study group of big RIAs that speak with Advisor Growth as part of its research has shifted significantly in recent years, Furey said.
"We'd sit around the table and be like, 'Most advisors treat their business like an ATM, because it's so easy to just take money out of it, not invest in it,'" he said. "And now it's the opposite."
