High valuations appear to be lighting a fire under investment advisors who may be considering selling their businesses, and that trend may continue for years, according to a new report.
Nearly 40% of RIA principals said that valuations are affecting their decision to consider a sale, according to the "DeVoe RIA M&A Outlook Study," released today. That response jumped to 62% among advisors heading firms with a value of $1.5 billion or more, the report said.
Sixty percent of the 168 advisors surveyed for the report said they expect heightened merger-and-acquisition activity to continue to increase for more than five years, which is down from 67% in last year's survey. Thirty-one percent said they expect the trend to continue for the next three to five years. Among RIAs worth $1 billion to $3 billion, 74% expect high M&A activity to continue for the next five years.
“Record valuation levels are not lost on RIAs as they contemplate potential sale timing and the possibility of expediting plans,” said David DeVoe, managing director at DeVoe & Co., a San Francisco-based consulting and investment management company serving the RIA industry. “We know that advisors don’t put economics as the top decision driver, [but] it’s still a factor."
While advisors stand to benefit if they put their practices up for sale under current market conditions, rushing to the negotiating table could be a double-edged sword. That's because advisors have been notoriously lax in securing the future of their businesses with a succession plan. In fact, 50% of advisors said this issue could be a "big future problem" for the industry, the report said.
“There’s a new revelation that succession planning needs to start much earlier to account for time frames when next-gen advisors can work up to an ownership stake,” DeVoe said in a prepared statement. “If advisors wait too long, an external sale often becomes the only answer, like it or not."
Only 17% of advisors said the possibility of a market decline is impacting their decision, and 50% of respondents said they are open to selling today.
"Advisors across all segments see mergers as one of their strategic options, especially as they seek to reduce costs and enhance the client experience in the face of competitive pressures," Tim Kochis, a DeVoe & Company special advisor, said in a prepared statement.
These were among the other survey findings:
• Fifty-one percent of advisors said that if they sold a stake in their firm, the chief drivers would be scale and succession.
• Fifty-four percent of advisors said they expect to acquire a firm within the next two years.
• Only 32% of advisors said they were confident that their firm's next generation would be able to buy out its founders. Thirty-four percent were confident the next generation could not afford to do so, and another 34% didn't know.