Advisory firm deal hype hurts advisers: Report

Don’t believe the hype that sensationalizes the sale of some independent advisory firms.

That’s the main message delivered in a new research paper based on the experiences of six large registered investment advisers, which calls some transactions “more myth than reality.”

The industry is doing advisers a disservice by playing up transactions that boast of “incredible outcomes” for the owners who sell the firms. What’s more, there is a lack of disclosure about the actual terms of advisory firm merger transactions, according to the paper, issued on Tuesday by the Alliance for Registered Investment Advisors.

Large deals, like the recent merger of Buckingham Family of Financial Services with Founders Financial Network LLC to create a $17 billion firm, get more media attention and give some advisers the false expectation that they can do the same whenever they’re ready, said Matt Cooper, president of Beacon Pointe Wealth Advisors LLC, an aRIA member.

National acquirers such as HighTower Advisors LLC, Focus Financial Partners LLC and United Capital Financial Partners LLC have been aggressively recruiting partner firms, which receive cash in exchange for giving a stake to the aggregator.

“Advisers see these big transactions out there in the news and they say ‘all I have to do is turn around and sell my business,’” said Mr. Cooper. “But in reality it’s very hard for a firm that isn’t exactly like the one being sold to base their sale on the same valuation; you have to dig in firm by firm.”

The larger firms tend to be the ones that have developed a self-sustaining business, with a focus on cash flow, a firm-level brand and long-term business planning — and those are elements that a buyer looks for and values highly, Mr. Cooper said. Firms that run an “annuity-type practice,” in which the owner builds a firm with consistent cash flow, can’t sell that business for as much because the firm isn’t likely to be worth very much without that owner at the helm, he added.

“What they don’t realize is if you aren’t constantly growing your business and adding new, younger clients, the value of your business is actually degrading,” Mr. Cooper said.

One mistake advisers make is not recognizing that the value of each revenue dollar is not equal and can be worth more or less depending on factors like the age of the adviser’s clients, the age of the adviser and whether that dollar of revenue is linked to the sale of a product or service, the industry paper said.

Other characteristics also hold down the value of some firms, according to the paper.

“Advisory firms that lack scale, have client relationships tied to owners or a small group of professionals, or lack business acumen are unlikely to generate any real business or enterprise value from an external buyer’s perspective,” it said.

The aRIA is composed of six RIA firms that manage a combined $20 billion in client assets, plus an advisory consulting firm. This paper, sponsored by Weitz Funds, is the first of four planned white papers about firm valuation and exit paths.

The association includes Mr. Cooper, Brent Brodeski, CEO of Savant Capital Management; John Burns, principal at Exencial Wealth Advisors, Ron Carson, CEO of Carson Wealth Management Group, Jeff Concepcion, CEO of Stratos Wealth Partners Ltd., and Neal Simon, CEO of Highline Wealth Management LLC.

Some of the firms involved with the group, including Exencial, plan to continue expanding their own businesses through mergers. Excencial wants to be a major player in the Southeast. Beacon Pointe, according to Mr. Cooper, also plans to add partners this year.