Advisory firm valuations are at a peak now, but that situation may not last long, according to Todd Doherty, who heads the valuations team for Advisor Legacy, a consulting firm for the financial industry.

The average financial firm valuation at Advisor Legacy recently reached $2 million, Doherty said in a recent interview. But several trends are in play that may change that within a few years, he added.

The industry is currently experiencing a near perfect alignment of improving practice metrics, including recurring revenue and profitability, an unusually strong seller’s market and historically low interest rates for acquisition lending, Doherty said. The alignment of these factors are very favorable to those who might consider selling or monetizing full or partial equity of their firms.

“This is a healthy time for advisory firms,” Doherty said during a recent interview. “Firms are experiencing a lot of growth and there is a lot of movement to larger firms.”

With the movement toward fee-based revenues, firms have a more predictable revenue stream, which makes them more attractive to buyers, and profitability is improving, he added.

The industry has been in a strong sellers’ market since 2019 and activity levels for mergers and acquisitions are at an all-time high. Many in the industry predict a continuation of that trend, but Doherty said there may be problems with that prediction.

The industry is waiting for the mass exodus of aging advisors and when that happens there may be a shift in the market for supply of firms and demand of willing buyers, Doherty said. “We do not have the younger generation of advisors following the ready-to-retire. There are hardly enough advisors in the generation behind the retiring advisors” to support a sellers’ market.

Another big concern is the increase in capital gains tax, which will increase the cost of a firm for the buyer.

In addition, firms headed by older advisors often have a preponderance of older clients, which makes the firms less valuable, he added.

Doherty said his firm is predicting valuations will peak in the next two to three years.

“Valuations are at a high now, so if an advisory owner is thinking of selling in the next two to three years, he or should should do it now, rather than waiting too long,” he said. “Advisory owners should monetize the value of their equity in their firms sooner, rather than later.”

Another trend impacting the industry is the increase in internal sales, he said. Grooming someone to take over internally smooths the transition process for the other employees and for the clients.

Advisor Legacy handles about 400 firm valuations a year and includes the mergers and acquisition services of the firm. Its associated firm, Key Management Group, provides executive coaching, back office operation and financial plan preparation.