Like everything from houses to Hummers, advisory practices are now on sale, say industry leaders, who note a change in deal structures that give buyers an edge.
Like everything from houses to Hummers, advisory practices are now on sale, say industry leaders, who note a change in deal structures that give buyers an edge.
“Many advisers have been pushed to where they're saying "uncle' and just want to get out,” said Mark Penske, chairman and chief executive of United Advisors Wealth Management, a Secaucus, N.J.-based hybrid that manages $62 million through its registered advisory arm and has grown through acquisitions.
“That someone wants to get out immediately tells you something,” he said. “You have to assume that some of their clients have lost a good amount in their retirement accounts, and that always pushes people's buttons.”
Mr. Penske said that depending on the situation, he can now buy firms for 10% to 50% below what he would have spent a year ago.
Industry observers say that in addition to receiving about 20% less for practices, on average, sellers are receiving 10% to 15% less money upfront. Earn-outs have been extended from five years to seven, in many cases, and many sellers are asking to become employees of the new owners.
Lower prices have set off a flurry of buying, particularly of smaller firms with $100 million and less in assets.
Matthew J. Matrisian, vice president of practice acquisitions for St. Petersburg, Fla.-based Raymond James Financial Services Inc., said that he anticipates a 20% increase in the number of firms being sold this year.
“I'm seeing more deals that shift the risk back to the seller. If the practice doesn't perform, and revenue goes down and clients leave, the seller won't get paid as much,” Mr. Matrisian said, noting that many sellers are frustrated by the decline in revenue and are eager to exit.
Executives at major custodian firms and independent broker-dealers say they're seeing the trend.
“A lot of smaller firms have profit margins of only 30% and their assets are down by 20% to 30%; their viability is a problem,” said Brian Stimpfl, managing director of adviser advocacy and industry affairs at TD Ameritrade Institutional in Jersey City, N.J. “We're going to see more of these folks merge with other advisory firms or become employees of the acquiring firm.”
At LPL Financial of Boston and San Diego, mergers and acquisitions among advisers are up about 15% from a year ago, said Sal Zambito, the company's San Diego-based senior vice president of business development.
“It's a buyer's market; those who have cash are king. Because many smaller advisers feel a more urgent need to get out, the buyer has power in structuring the deal,” he said.
Dana G. Sippel, a certified public accountant and certified financial planner with nearly 20 years of experience as an adviser, is looking to buy an advisory business and realizes he's shopping at a good time.
Recently laid off from U.S. Trust, a division of Charlotte, N.C.-based Bank of America Corp., Mr. Sippel wants to operate a practice close to his Rockville, Md., home and is in the process of setting up his firm as Compass Financial Solutions LLC.
After meeting with several potential sellers, he said he will offer a down payment that is 10% to 15% below what he would have needed just six months ago.
He anticipates the total cost of the practice he buys will be 20% lower.
“Deal terms have changed over just the last three months,” he said. “Cash has become even more important.”
Even though he is paying less, Frederick J. Schaard, president of Rehmann Financial in Lansing, Mich., said he likes to add the seller to his staff and wants him or her to feel comfortable with the deal.
“You're not going to have a happy employee if you underprice them too much,” said Mr. Schaard, whose firm manages $1 billion in assets. “There's a fine line in making sure both sides are happy.”
Advisers who decide to sell their practices now must accept current values, said Joni Youngwirth, managing principal of practice management at Commonwealth Financial Network in Waltham, Mass.
“There isn't a creative way to increase the value of what they have to offer,” she said. “The value is the value.”
E-mail Lisa Shidler at lshidler@investmentnews.com.
