RIA firms are basking under the warm glow of the persistent bull market and the second-longest GDP expansion on record.

And the strong markets have produced huge revenue growth for RIAs: Advisory firms averaged about $1 million in revenue in 2012, but grew that to $2.9 million currently—a CAGR of 19.2 percent, according to mergers consultant Echelon Partners.

More growth is coming, as the $60 trillion of assets now handled by the entire wealth management industry looks like it could double over the next decade, said Echelon managing partner Dan Seivert at the firm’s annual Deals and Deal Makers Summit in Newport Beach, Calif.

But what happens when the market turns?

A 20 percent drop in the market would be perfectly normal, but could seriously hurt valuations for advisors looking to sell out. Echelon estimates such a drop would cut RIA assets and revenues by 15 percent.

More importantly, profit margins would be cut in half (to about 12 percent) and valuation multiples would fall by 25 percent (to 4.5 times cash flow). The multiple drop, combined with lower profits, could lower valuations by 70 percent, according to Echelon.

And with a slowdown, credit for deals will be tougher to obtain, Seivert added, further hurting values.

Good organic growth “will help weather down markets” in terms of supporting valuations, said Carolyn Armitage, Echelon managing director. A record of successful recruiting will also help, she said.

Of course, lower valuations might help acquirers. Buyers of advisory firms already get good deals on fast-growing firms with $100 million to $1 billion in assets, Seivert said, because sellers tend to underprice the positive effect of high growth rates. As a result, PE firms have been achieving internal rates of return of 30 percent to 40 percent, he said, which has drawn in these types of strategic buyers to the point where they now dominate the market for RIA firms.

Strategic buyers were involved in 46 percent of publicized deals in 2017 and 2018, Armitage said. A decade ago they accounted for about a third of deals. Seivert expects PE firms, consolidators and other serial buyers to continue to dominate the deal market.

However bad it might get for RIA firms, independent broker-dealers could suffer far more in a downturn. Independent B-Ds have seen their margins shrink from 11 percent to 3 percent over the past 10 years, Armitage said, as consumers and advisors have moved out of traditional commission channels.