Peter Mallouk is the president and CEO of Creative Planning, LLC., and its affiliated companies. Creative Planning provides comprehensive wealth management services to clients. These offerings include investment management, financial planning, charitable planning, retirement plan consulting, tax service and estate planning services. Creative Planning manages or advises on over $225 billion in assets across all 50 states and 65 countries, as of December 30, 2021.

Russ Alan Prince: Your firm has been on an acquisition spree for the past few years and growing at such a fast pace. Give us your take on the state of the M&A market.

Peter Mallouk: We have seen massive consolidation in the industry over the last few years until recently, M&A was on track to pick up every year. We saw M&A peak in the fourth quarter of 2021 when the markets were strong, but after living through a pandemic and a slew of government shutdowns, I think a lot of people began to realize how quickly their businesses could take a turn. 

In addition to all of that, the typical advisor is older, the marketplace is becoming more competitive, and investors want firms with strong technology, compliance, and services. This is all normal stuff, but when you see it all happening at once, it creates a pretty tense environment. Since the beginning of the year, M&A has slowed down considerably, but we are still seeing these normal trends at play. Internal succession planning has become harder, and advisors know they may need help to compete in this new age of wealth management.  

Prince: What types of buyers are out there, and how does a seller choose the right one? What do you look for as a buyer?

Mallouk: I always advise sellers to ask themselves three things before settling on a buyer. 

First, you need to consider what is best for your clients. If your clients value hedge funds, for example, the buyer should be a firm that includes that as a part of their core offering. When selling, it’s imperative to find a place that will provide clients with what they came to you for in the first place. Think about the client, and the client's expectations, and ask yourself this question: Will this sale enable me to get my clients what they expect from us and hopefully more?

Second, think about what’s best for your team. Obviously, you want to offer your advisors job security and ensure they feel they have a role at the new firm, but it’s also important to think about finding a buyer who can give your employees the best opportunity for growth. When you look at a potential buyer, make sure you’re considering whether this is a firm that’s growing steadily and has natural room for your people to progress.

Finally, it is important to reflect on what’s best for you going forward. Do you want your brand to stay the same, or are you happy to integrate completely? Are you looking for liquidity? How much longer are you planning on working until retirement? Some firms will allow you to keep your branding and get liquidity without any integration, while others will require total integration—their brand is your brand, and their offering is your offering. Answering these questions will help you to find a firm that will work best for your personal goals.  

Prince: What drives valuations and what trends are you seeing?

Mallouk: There are so many factors to consider when determining a firm’s worth. Even if two firms have the same assets, revenues, or earnings, that doesn’t mean they are going to have similar valuations. If one firm is growing and adding new clients and the other is losing clients, it stands to reason that the former will be worth more in the long run. Additionally, a firm with an average client age of 40 is going to be worth more than a firm with an average client age of 80, and firms with high turnover rates will be worth less than those with strong retention. 

Valuation is ultimately determined by three key factors: What the client base looks like, whether money is coming in or out of the business, and whether the business is on track to grow. The credentials, background and age of the people involved are obviously large factors as well, but actual earnings play a much smaller role in determining the value of a company than you may imagine. 

Given the ongoing trend toward consolidation, which I predict will continue for some time, it’s becoming an increasingly competitive marketplace. Similar to what is currently happening in the CPA landscape, I predict we will be seeing several large firms, a lot of strong regional firms, and thousands of smaller firms. Those smaller firms are going to need to specialize in some way to stand out—whether that’s providing a low-cost option, giving white-glove service, or specializing in a certain kind of practice, this is where I see the RIA industry heading over the next 10 to 20 years.

Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.