As the economy emerges from the financial crisis, the RIA business is recovering faster than most other industries. But that rebound in revenues and assets has not translated into higher valuations for RIA firms or an increase in M&A activity.

Advisors are three years older than they were in 2008, and as one acquirer notes, age isn't working in their favor. The older the advisor, the more likely buyers are inclined to make lowball offers, reasoning that the seller is holding a lot of high cards.

Another factor hamstringing merger activity in the RIA space is the absence of several former classes of buyer. Banks, the acquirers with the deepest pockets, have spent the last three years licking their wounds and repairing their balance sheets from the ravages of the housing bubble.

Roll-up firms also have curbed their activity. Memphis-based WealthTrust has encountered financial difficulties, and sold some of the RIA firms in their network back to the original owners. Last year, Focus Financial Group was forced to raise a second round of capital, diluting the original investors and advisors who affiliated with them before the financial crisis. In some other cases, there are reports of squabbling and looming cramdown battles for controlling equity interests between senior lenders, mezzanine lenders and private equity investors as the entities wrestle with problems caused by excessive leverage.

Meanwhile, Mark Hurley's Fiduciary Network reportedly is profitable. But it is only making two to four investments per year, so it hardly represents a solution to thousands of RIAs wrestling with succession issues.

Some observers think the RIA business simply is not conducive to the roll-up model. Private equity firms and lenders don't have a lot of experience dealing with businesses where most of the assets are intangible, one observer explains.

Another expert sees it the same way. "Roll-up firms are rarely successful in people businesses," Pershing Advisor Solutions CEO Mark Tibergien says. "You need to get to critical mass quickly to establish credibility. And you need to get to that liquidity event fairly quickly, say within five years."

Negotiating each deal with individual RIA firms is an arduous undertaking that often takes six to nine months. After all that, the two parties frequently end up deciding not to complete a transaction.

The questions advisors must ask before entering a deal are multidimensional. "What price does the stock have to reach to be worth giving up the cash flow to fund the parent?" Tibergien asks.

The value of the parent's equity is partially determined by the quality of the other firms in the consolidator's portfolio. "If it's a portfolio of old advisors who are no longer in a growth phase, that's what you have stock in," Tibergien says.

Reaching the critical mass to market an initial public offering that attracts an institutional investor following means the consolidator needs to have a minimum market capitalization of $1 billion. That means the roll-up vehicle needs to have EBITDA of about $100 million without the lion's share of cash flow coming from amortization. "Otherwise, you are just another small-cap company without institutional coverage," Tibergien says, adding that a consolidator with a bunch of aging advisors in their 50s and 60s isn't a very sexy or compelling IPO compared to Facebook.

Even if a roll-up is convinced it doesn't need an institutional following to go public, the bar has risen. John Temple, managing director at Cambridge International, an investment bank specializing in financial services firms, says that since the 2008 crisis, a company undertaking an IPO now needs $50 million, not the pre-crisis $20 million, in EBITDA. Furthermore, the financial services business may have bounced back, but it doesn't possess the allure it once did.

Moreover, the most successful roll-up vehicles that have managed to go public have erratic stock price histories that may not help future IPO candidates. Like all financial services shares, National Financial Partners (NFP) and Boston Private Financial Holdings got slam-dunked during the financial crisis. NFP, which once traded above $58 a share, fell to below $2, while Boston Private fell from an all-time high north of $33 a share to about $3.50 a share.

Both companies' shares have recovered some fraction of their losses-NFP recently traded at about $13.40 a share, and Boston Private, which also owns a troubled real estate lender, changed hands at $6.65. One institutional investor notes that if this is how the two most successful roll-ups performed, why should they even consider investing in lesser organizations?

With a shortage of financial buyers, many advisors are exploring other alternatives, including internal succession planning and regional expansion through tuck-in acquisitions. An advantage to this approach is that an RIA firm can eventually reach the critical mass and financial scale to develop an internal succession that it can self-finance.

One firm that has experimented with this alternative is Long Beach, Calif.-based Halbert Hargrove, which has 30 employees and $1.8 billion in assets under management. "We made the decision not to sell to Focus or Fiduciary Network," says Russ Hill, Halbert Hargrove's chairman and CEO.

One luxury that the firm has is "a fairly young president," Hill explains. John Abusaid, who is 44 years old, also serves as chief operating officer. Halbert Hargrove has extensive regional reach in the western United States, operating offices in San Diego, Denver, Phoenix and the Seattle suburb of Bellevue, Wash.

In late 2003, the firm entered the San Diego market when it acquired-or, as Hill puts it, "affiliated"-with Klosterman Capital. Like Hill, Steven Klosterman was a Stanford M.B.A. and they shared a similar investment philosophy. Halbert Hargrove also bought the firm in Bellevue. "It is the first [non-home] office that causes the problems," Hill explains.

While the San Diego and Bellevue acquisitions have worked out for Halbert Hargrove, two other deals in eastern Washington and the Chicago suburbs did not and were subsequently unwound. "Getting the right cultural fit" and sharing the same investment perspective are important, Hill says.

"You have to be in the same tent to make it work," he continues. That means being willing to spend "a lot of time" in exploratory, pre-merger discussions. "You have to be willing to kiss a lot of frogs and walk away from deals even when they are nice guys."

Budros Ruhlin & Roe of Columbus, Ohio, has devised a creative internal succession plan that might serve as a model for other firms in a similar position. Budros, who founded the firm with Peggy Ruhlin in 1987, told Financial Advisor in 2005 he never expected they "would sell the firm for a large sum of cash."

The plan is based on techniques that Ruhlin, the firm's CEO, employed when she was a CPA working with clients operating dental practices. With about $1.5 billion in assets, the firm has two partners in their 60s and two in their 40s, so it has the talent in place to engineer a successful transition. As part of their shareholders' agreement, the partners are bound to sell their shares at the age of 70, though they can continue working and draw a salary.

Essentially, the plan allows the purchasing partners to buy the senior partners out at a discount to a valuation of the firm furnished by Moss Adams at the time of a purchase or sale event. There are several reasons for the discount. Selling shareholders get capital gains tax treatment on the transaction, but purchasers don't get any tax deductions for the payments to the seller. Also, it limits the amount of debt the purchasing shareholders or the firm would have to assume to buy out the others.

But there is also a clawback provision to ensure that the purchasing shareholders don't simply turn around and flip the firm at a big multiple once they buy their shares at a discount. That provision would make the selling partners whole if the firm is sold within two years after a partner is bought out.

Still, Ruhlin notes that while their firm has recovered nicely from the financial crisis, valuations have not.