Wealth managers primarily sell their practices to acquire greater growth resources or as an exit strategy. Unfortunately, half of those who sell are unhappy with the results. Nevertheless, the selling of wealth management firms is strong, with significant multiples, but that will not last for most.

Within the next five years, the “fascination” with inorganic growth and the fantasy that accompanies it will crash into reality. Consequently, multiples for most wealth management practices will decline. There are three primary reasons selling will become less profitable:

• Most acquirers will fail to generate meaningful organic growth.

• Fewer wealth managers will be successful.

• Generative AI will remake the wealth management industry. 

Most Acquirers Will Fail To Generate Meaningful Organic Growth
The industry media is full of examples of wealth management firms selling to other wealth management firms, aggregators or other financial institutions. There is a lot of fanfare announcing deals.

The deals regularly discuss the acquired firm's assets under management (AUM). The complication is that AUM and profitability, while often correlated, are not the same. As such, bringing on lots more AUM does not necessarily transform into larger, more successful and more profitable wealth management firms. Still, people seem to be excited, and that excitement translates into higher multiples for sellers.

The real complication is that all this attention to larger wealth management firms can hide the fact there is little or no organic growth. While combinations can squeeze out some costs, they will rarely be enough to justify the prices paid to wealth management firms (see “When Investing In RIA Aggregators Is A Really Bad Idea”).

It is certainly possible to generate significant organic growth. For example, among the more successful wealth managers, doubling income in 18 months or less is certainly doable. However, despite their intentions, most wealth managers will likely never be able to move upmarket.

It will become evident that inorganic growth alone will not deliver the returns acquirers seek. For example, many private equity firms pouring millions upon millions into the wealth management industry will fall short if they do not find a greater fool, making them no longer willing to pay what are egregious multiples for average and subpar wealth management firms.

Some acquirers will be able to accelerate the success of the wealth management firms they buy. However, acquirers will pay considerably less for wealth management firms over the next few years if they cannot produce reliable organic growth.

Pro tip: Before the many acquirers who cannot grow organically get smart, you might want to consider selling.

Fewer Wealth Management Firms Will Be Successful
The private wealth reset is a powerful trend impacting the profitability of wealthy management firms and, thus, their ability to command high prices upon sale. A significant reason for the high profitability of many wealth management firms is the naivete of their clients.

The private wealth industry favors professionals. The result is that most clients are poorly served because they are satisficing instead of maximizing. However, this scenario is slowly changing, and maximizing will become increasingly normative over the next five years. Already, the very wealthy, such as those with high-performing single-family offices, are critically and intelligently evaluating the professionals and negotiating with them, ensuring they control the process and optimize their financial lives.

Today, some wealth managers support and benefit from the private wealth reset. They can relatively easily replace the current wealth managers of the wealthy. Only a small cohort of wealth managers can consistently achieve these outcomes, helping to minimize the equity value of most wealth management firms.

This ties back to the previous point, the need for organic growth. With margins continuing to be pressured, and more so as clients become empowered, only those wealth management firms that can help their clients make smart decisions will justify high multiples when sold.

Pro tip: Because of the private wealth reset, many wealth management firms will become progressively less profitable, so it might be wise to sell before acquirers realize they are buying a wasting asset.

Generative AI Will Remake The Wealth Management Industry
By 2030, the wealth management industry will look very different. Wealth managers will have evolved into para-advisors and wealth advocates, and there will be fewer of these professionals than there are wealth managers today. Meanwhile, most technical specialists will become redundant.

Generative AI will seriously commoditize much of the wealth management industry by allowing para-advisors to deliver the same level of expertise across the board. For most families and individuals, para-advisors can offer exceptional expertise. Meanwhile, wealth advocates will work with the top 1%, controlling between 70% and 80%, maybe even 90%, of the world’s wealth.

Para-advisor practices will have very low multiples. They might sell for one or one and a half times 12-month, trailing revenues or less. As the compensation for wealth advocates will be exponentially greater, considering the nature of that compensation, they will sell for 15 to 20 times 12-month trailing revenues with substantial kickers for investment participation.

Pro tip: Unless you are on track to become a wealth advocate, it is wise to sell before para-advisors become commonplace.

The Five-Year Window
By 2030, if you want to sell your wealth management firm, you must be very discerning and well-positioned to grow organically. While there will still be buyers, most wealth management firms' acquisition prices will be at all-time lows and likely to keep going lower.

Why would someone bother acquiring a wealth management firm when less expensive alternatives that can produce the same or better results are available? This means that for most wealth managers (most, not all), the next five years will be the best time to sell for the best price possible.

On the other hand, wealth managers who become wealth advocates, helping the 1% make smart decisions, can command enormous multiples for their practices. These professionals will generate significant organic growth, capitalizing on generative AI as the private wealth industry resets.

Jerry D. Prince is the director of Integrated Academy, part of Integrated Partners, a leading financial advisor firm. Russ Alan Prince is a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.