Interest rate increases could decrease the value of advisor practices in the same way they reduce the value of homes, Greg Gessert, LPL vice president of strategic business solutions, said at the company's Focus conference.
“My personal feeling is that values are at their peak,” he said.
He offered advice on how to best do a valuation and made observations on the deals LPL is seeing.
Gessert also gave reasons for why advisor practice values may go down:
Interest rates – Rate hikes often reduce the value of homes. As the price of borrowing goes up, Gessert believes the prices of practices will also go down.
Supply And Demand – With the increase in seller supply from the large wave of advisors that will be exiting the industry in the coming years, it can increase competition and ultimately lead to discounts in overall valuations.
Lower Client Lifetime Value – “As clients age, you will expect the value to go down,” said Gessert. To counter this realization, advisors need to recruit the children of clients and make them clients.
DOL Ruling – There will be a likely shifting of the incentive base. If compensation is being pushed forward in a "level load" manner, it pushes out the revenue, which lowers the present-day value. Gessert explained, if you take money that you think you were going to make today and push it out three or four years, the discounted rate will lower the current day value. For some, the potential changes might even eliminate types of revenue.
Lower Velocity – As advisors get comfortable with their financial situation and phase into retirement, the value of their practice naturally declines. “Typically, some of the older advisors would use A shares," he said. "Younger advisors have a higher return on assets because they more likely invest in fee-based programs. It is good to know you are continuing to invest in your business.”
John Napolitano, chairman and CEO of U.S. Wealth Management, one of the fastest growing LPL firms, believes valuations are changing right in front of our eyes. His opinion is that there are too many advisors ignoring the important task of finding a successor, even if it is only a contingent successor.