Business has never been better and that's why RIA firms should at least consider the option of selling their firms, several Fidelity executives said yesterday at the financial giant's Inside Track conference in New York City.
Many RIA firms are enjoying record years in revenues and profits, as well as high levels of client satisfaction, so they may feel little urgency when it comes to exiting their business. But inertia could be costly, Scott Slater, vice president of practice management and consulting at Fidelity, told advisors in the audience.
At the very least, he suggested that RIAs go through some of the key steps any business would follow if it were planning to sell itself. One of the biggest obstacles in mergers and acquisitions in the RIA universe is the huge gap between the few businesses serious about selling and the vast number of firms exploring it.
Each firm has its own individual set of priorities, but if a consulting expert were to arrive "on earth from Mars" and study this profession, they'd be definitely telling RIAs to consider cashing out, added David Canter, executive vice president in charge of Fidelity's custodian business.
If your firm is growing and has a diversified pool of talent, there are numerous acquirers with lots of capital looking to invest in this sector. Last year Canter estimates there were 120 transaction in the RIA universe of more than 35,000 firms.
Other reasons to consider selling include the current advanced point America finds itself the economic and financial market cycles. Canter said that Fidelity research finds that both advisors and clients believe current valuations in equities are reasonable, but both groups believe there will be a correction in the next 6 to 24 months. And they are less optimistic about equity returns going forward after a nine-year bull market.
Among the acquirers, there are multiple models for selling firms to choose from, Slater said. He believes branded acquirers like CAPTRUST, BeaconPointe, Mariner Financial, HighTower, United Capital, Kestra and Carson Group may have some the most intriguing offers.
But Focus Financial is flush with cash following its IPO and may be best positioned to write the biggest checks. Size remains a critical factor.
Slater said no deals are being valued on a revenue basis but asset size remains important. The 4 percent of all firms have more than $1 billion but they control 60 percent of all assets.
EBITDA (earnings before interest and taxes plus depreciation and amortization), a standard measure of cash flow, is still the primary valuation metric. Firms with less than $250 million in assets can expect a buyer to pay 5 to 7 times EBITDA and entities with up to $500 million might get 5 to 8 times their cash flow.