Advisory firm valuations might be nearing a top, but advisers should not expect the appetite for investing in their businesses to drop off anytime soon.
"Our industry is all of a sudden very fashionable, and we are awash in capital," said Rich Gill, partner at Wealth Partners Capital Group, during a panel discussion Wednesday at The MarketCounsel Summit in Miami.
"What's really important is understanding the motivations of the capital and their time lines," he said. "If you think you're going to need capital down the road, I would start educating yourself now to be more prepared when the right time comes."
Mr. Rich was joined on the panel by Marty Bicknell, chief executive of Mariner Wealth Advisors, and Shirl Penney, president and chief executive of Dynasty Financial Partners.
Access to capital for registered investment advisers can come in many forms, including both debt and equity financing, and from private-equity investors or a longer-term partnership.
Mr. Penney said the primary reasons an RIA considers outside capital are ownership diversification, to invest in the business, to make acquisitions and to finance succession planning.
But whatever the reason, the panelists stressed being as informed and prepared as possible before entering into any kind of capital agreement.
"You have to understand what the motivation is of the outside investor," Mr. Penney said. "And the best time to raise capital and sell a piece of your business is when you don't have to."
In other words, if you're desperately seeking a capital infusion, you are putting yourself at a disadvantage.
In terms of preparation, which Mr. Gill said should begin at least three years before actually taking outside capital, the idea is to make an RIA presentable but also in a position to stand up to strict scrutiny from potential investors.
"Think about professionalizing your organization," Mr. Bicknell said. "If I can't see a bench, then I worry about my risks. A strong organization built around a strong leader tends to push me to the higher end of the valuation range."
Mr. Penney advised establishing a board of outside directors to help guide the process.
In terms of valuations, panelists agreed that assets under management is not the biggest factor.
"Growth and scale are key elements of valuations, but the other thing is people," Mr. Gill said. "You can't have a situation where if a person gets sick for two weeks the business comes to a screeching halt. You need a next generation of advisers, operational staff and professional folks. As an industry, not enough firms have made the necessary investments or the necessary partnerships."
For RIAs just starting to consider outside capital, the good news is, there is plenty of time to get ready.
"Regarding the opportunity for capital wanting to come to this business, there's plenty of runway and it will be around for years," Mr. Bicknell said. "But I do think valuations have run a little too high."