Last month, at the MarketCounsel Summit in Miami, during a panel discussion about advisory-firm valuations, Rich Gill of Wealth Partners Capital Group cited what might be 2018's most bankable theme in the financial advice space.
"Our industry is suddenly very fashionable, and we are awash in capital," he said, driving home the point that financial advisory firms are enjoying an unprecedent seller's-market environment.
There has perhaps never been a better time to be sitting atop a thriving financial advisory business. The financial markets are hovering in record territory, which typically equates to lots of satisfied clients paying steady, predictable fees.
That is a large part of the appeal, and helps explain why the financial advice business has seen growing interest from a new breed of buyer in the form of private equity investors, who are joining the field of savvy strategic buyers, consolidators and banks.
The pace of mergers and acquisitions paints the picture of a ferocious appetite for registered investment advisers. In the first two weeks of the new year, a half-dozen deals have already been announced.
But for potential sellers, the caveats abound.
For starters, don't confuse this seller's market with a more traditional real estate seller's market, where buyers and sellers are often operating on the same level.
The RIA space, which has long comprised a fragmented universe of firms, from sole proprietors to mega-conglomerates, is heavily populated by firms with less than $100 million under management. In fact, nearly 75% of firms fall into this category.
Stack that up against the private equity space, for example, which is sitting on nearly $1 trillion of "dry powder" looking for investment opportunities, and you start to get a sense of how lopsided the negotiating table could become.
The deep-pocketed and highly sophisticated private equity investors have taken such an interest in the financial advice space over the past few years that some analysts have described it as an inflection point that could further turn up the heat on M&A activity as traditional buyers jockey for position.
Different buyers have different motivations. Private equity investors, which tend to take temporary ownership stakes, are looking for a return for their shareholders.
Larger RIAs and consolidator firms, such as HighTower Advisors, Fiduciary Network, Mercer Advisors, Carson Group, Mariner Wealth Advisors and CapTrust, are often looking to build brands and bigger footprints.
It's about scale
And it's almost always about scale in the RIA space, where any public discussion about valuations rarely goes beyond hypotheticals.
For instance, while it might be natural to assume assets under management top the list of valuation criteria, some buyers say such data are never enough for even a simple valuation metric.
However, buyers will acknowledge that firms with more assets tend to fetch higher valuations. But that is because larger firms are more likely to encompass many of the other important valuation characteristics, such as having a professional internal infrastructure that includes strong leadership, a formal succession plan and the latest technology systems.
Still confused about how much your advisory firm might be worth?
Get used to it, because buyers insist RIAs are as unique as fingerprints, which means valuations will continue to entail more art than science.
This is where sellers need to be on their toes and understand why they're even entering into discussions with potential buyers, well before they enter into those negotiations.
Some M&A veterans suggest taking up to three years to prep and "professionalize" your firm for a potential sale. That process should include at least one outside audit to establish some specific valuation targets.
Maybe somebody will eventually develop a Zillow-like model to help value RIA firms. But until then, sellers will have to sharpen their pencils and elevate their game, and be grateful that it's a seller's market.