RIA Acquirers See Upward Pressure on Valuations
Despite already high RIA valuations, the figures could continue to rise due to a robust buyer’s market, said Jeff Dekko, CEO of Wealth Enhancement, an acquisitive registered investment advisor that has grown to nearly $125 billion in client assets.
Dekko, speaking at Schwab’s Impact conference in Denver this week, said the market is being driven by approximately 75 private equity-backed acquirers and 25 non-private equity-backed buyers, bringing the total pool to around 100 firms.
“Everything is about 12x headline to 14x headline, and sometimes higher for larger firms,” he said. “And there’s definitely upward pressure within that.”
The structure of those acquisitions under consideration is typically a combination of equity, deferred compensation (such as an earn-out) and cash.
The CEO cautioned RIAs against being the “first acquiree” by dealmakers, noting that it’s better to partner with a firm that has a proven track record of dealmaking, not “hobbyists” in the space.
Jennifer Souza, CEO and president of minority investor Emigrant Partners, agreed that the market for RIAs was “frenzied” at the moment, with multiples for RIAs having increased over the past five years. Beyond a protracted market downturn, deal activity is expected to continue.
However, she advised RIAs not to be distracted by the big-ticket numbers and to remain focused on their own shops to achieve the best valuations in the end.
“Think about not so much the multiple, but the opportunity to create value within your business,” she said.
Souza pointed to cultivating talent, having strong organic growth that is sustainable, and professionalizing the business.
“Professional financial management of your business,” she said. “Infrastructure, technology investment, investment in marketing as an enterprise, not just your advisors doing it off the side of your desk. All of those are important to really drive value.”
Eric Kittner, CEO and chairman of Moneta, said the valuations make sense in the RIA space, considering that margins are good and client relationships are sticky.
“I’ve asked every RIA out there if they’re disappointed that they own an RIA, and every single one says no,” he said.
Moneta, which has about $43 billion in client assets, is not private equity-backed. It operates through a partnership model with its RIAs, with deals often being equity swaps in which an RIA gives up equity to Moneta in exchange for ownership in the larger firm.
Due to that model, Kittner said Moneta often has to manage partner expectations of the high valuations they see in the market.
“If you’re interested in accepting perhaps a little bit of internal discount on the transaction, again, benefitting over the longer period of time, that makes a lot of sense,” he said.
The panelists agreed that, if an RIA seller is seeking the largest possible paycheck for a deal, it may not work out well in the long run.
“Valuations are fantastic; it is a great time to be an RIA,” said WEG CEO Dekko. “The real date that matters is a year later, when you consider whether you made the right decision, and whether the people that left felt they made the right decision, including your clients.”
Moderator John Furey, managing partner at Advisor Growth Strategies, noted the various types of buyers and models open to RIAs in the space.
On the sidelines of the conference, Furey also pointed to a trend in which firms are merging to add different types of services and create scale.
His ASG had recently consulted on a transaction that brought together two firms, Alphacore Wealth Advisory and Callan Capital, to create a combined RIA with approximately $6.5 billion in client assets.
“You’ll see more firms say, ‘you know what, let’s do a combination, like an equity swap, to solve for things,’” Furey said. “‘Instead of going to a big aggregator to get what we need, we’ll combine.’”
Such mergers could also be beneficial for firms seeking succession planning strategies.
“One thing most people forget is that most RIAs don’t even want to do a deal,” he said. “It’s often the option of last resort.”