M&A on a tear, and women advisors going solo, IN study shows

It’s a good time to be a seller in the financial advice business, with nearly four times as many firms looking to acquire advisors than those who want to be bought.

And that, data from the latest InvestmentNews Advisor Benchmarking Study, is helping drive valuations higher than ever. The biggest firms commanded multiples of 10 times their earnings before interest, taxes, depreciation, and amortization in 2022. While 30 percent of firms surveyed said they attempted to buy others during the prior two years, 34 percent said they would try to do so over the coming two, the report found. And during those time frames, fewer seem to be willing to sell, with 9 percent having tried for deals over two years and 8 percent planning to through 2025. The study is based on responses from 100 independent advisory firms surveyed in 2023 for their experiences in 2022.

For more information about how to subscribe or purchase the InvestmentNews Advisor Benchmarking Study, email bryony.garlick@keymedia.com.

“There is so much capital available in the space for acquisition,” said Randy Long, founder and chairman of SageView Advisor Group. Despite costs of capital rising along with interest rates, demand for acquisitions remains high, particularly as private equity money has been flooding into the financial advice business and allowed firms to keep expanding, he said. Because of that, valuations as multiples of EBITDA have stayed level of the past couple years, he said.

The CEO owners of advisors may also be encouraged to increase EBITDA by forgoing some of their compensation and putting it back into the business, he said. That might be one reason why CEO compensation declined slightly, with the average based compensation going from $270,000 to $250,000 between 2021 and 2022 and total compensation decreasing from $325,000 to $317,000, according to the recent InvestmentNews study. During that time, average pay for other positions outside of the C-suite increased modestly, the data show.

Further fueling mergers and acquisitions, as well as historically high valuations, is the increasing role of companies like Echelon Partners and DeVoe & Co., as investment bankers rarely worked with smaller financial advisors in the past, Long said.

“Working with an intermediary has helped create higher valuations and more benefit to the business owner,” he said.

And it isn’t surprising that there may not be as many firms looking to sell, said Marguerita Cheng, CEO of Blue Ocean Global Wealth.

“This is their life’s work. People are being selective with their business transition strategy,” Cheng said. “Some people don’t truly want to exit – they want to offramp on their terms.”

The buying frenzy ramped up valuations over the past few years, but that could start to cool, said Chuck Failla, principal of Sovereign Financial Group.

“Everyone in this industry is a buyer and no one wants to sell, at least at a reasonable price,” he said. “When money was free, you could get really ridiculous with those [EBITDA] multiples.”

A group of 15 different RIA owners might say that they’re getting 15 times EBITDA for valuations, but that doesn’t mean that the multiples are apples-to-apples, as contracts contain earnouts, claw backs, and other provisions, he said.

“Each deal is really, really different, and there is no simple sales price,” he said. “But what’s not surprising is the bigger the firm, the higher the multiples.”

Gender representation

Another finding of the study is that women are underrepresented in firm ownership, and that skews higher with company size. Just 18 percent of the biggest firms have female ownership – but among solo firms, a third are women-owned.

That finding suggests that some women advisors found their own firms after being unable to progress at larger RIAs, according to the report.

But there are many reasons for going solo, not least of which is building something that works for the advisor.

Cheng, who founded her own firm in 2013, did so because she wanted to work on her own terms.

“One of the reasons why I did it was to better serve my clients. I really value flexibility,” she said. “It wasn’t that I worked less – I just had more flexibility.”

She was caring for her father for a year and a half, during which time she communicated with her clients about her availability, and she deliberately avoided taking on new customers, she said.

“My clients were so caring and supportive. Many of them even said, ‘That’s why we work with you,’” she said. “There is a different type of pressure where you are able to have more autonomy over your schedule and how you serve your clients.”

The flexibility that is possible with owning a firm is why some women are drawn to start their own practices as well, she said.

It’s also likely that women start their own advice businesses because they want to build something that fits with their own values and culture, Failla said.

“It’s good to see that these [representation] numbers are rising for people who aren’t just middle-aged white guys,” he said.

Further, household wealth is increasingly held by women, and many are drawn to working with female advisors, Long said.

“Women are being more and more recognized and accepted into the industry, and I only see that continuing to accelerate,” he said.

For more information about how to subscribe or purchase the InvestmentNews Advisor Benchmarking Study, email bryony.garlick@keymedia.co