Eleven years after writing a white paper that rocked the financial advisory profession, Fiduciary Network CEO Mark Hurley has returned with another white paper designed to shock and awe the RIA community. It's called "Creating, Measuring and Unlocking Enterprise Value in a Wealth Manager." (A full copy of the report is available at www.fiduciarynetwork.net.) Why did he and his staff at Fiduciary Network write the paper? After all, as an investment company that has made stand-alone investments in ten RIA firms, Fiduciary Network has skin in the game. But Hurley revels in the role of provocateur. The firm only plans to invest in another ten to 20 firms, and his goal is simply to pass on information, he says.

What he says he's found, during the last three years as his company has held casual conversations with hundreds of RIA firms, is that misconceptions abound about firm acquisitions. True to form, Hurley begins the paper by claiming that only 200 to 400 firms in America have enterprise value, and the other 19,000 or so have little or none.

How is it that more than 95% of the businesses that populate this profession would be worth bupkus?

Hurley says it's that the profitability at many fee-based firms is contingent on the future sales of financial products since these firms don't have enough recurring revenue to command a respectable valuation. In these cases, the real economic value resides at broker-dealers like LPL Financial, Raymond James and Commonwealth Financial Network.

On the fee-only side of the business, the majority of firms make no money beyond the owner's salary, so in reality owners are subsidizing the business with their labor, in Hurley's view. "Most fee-only firm owners earn market-level wages," he claims, adding they could give up their equity, move to a bigger firm and significantly increase their income.

Moreover, the fact remains that even the largest RIA firms in the business-those with several billion dollars in assets-aren't that big. "They won't appeal to a strategic buyer," Hurley claims, adding that strategic buyers typically are the acquirers who pay the largest premiums. Valuing an advisory firm is also a vexing task. "No one can predict how many clients the firm will add or what the market will do," Hurley explains.

And yet sadly, many advisors labor under the delusion that their firms "are incredibly valuable," the report says. When it comes time to sell their business, most advisors cite some report-often a false one-about the sale of another firm at a stratospheric multiple.

Feeding these delusions of astounding value is a cottage industry of investment bankers who specialize in RIA mergers and encourage advisors to make deals. The actual truth is that very few transactions for RIA firms at remarkable prices have ever occurred.

Equally problematic is the Lake Wobegon mentality afflicting advisors the same way it does active asset managers: Survey after survey reveals that 80% to 90% of active mutual fund managers view their investment prowess as above average, even though most fail to beat their benchmarks.

Advisors Are Overconfident
Many advisors believe their knowledge about investments and financial planning automatically translates into talent in other financial areas, like mergers and acquisitions. It doesn't.

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