Market volatility pushes more RIA owners to negotiating table

With firm valuations tied to stock market levels, RIA owners look for exits

Nov 27, 2018 @ 1:44 pm

By Jeff Benjamin

The choppy financial markets might be rattling investors, but for savvy owners of advisory firms the scenario is playing out perfectly because it's driving merger and acquisition activity.

Those paying close attention are not surprised that consolidation in the financial advisory space is headed for another record year just as the equity markets approach bear territory.

"If you take a step back from all the M&A activity, you'll see that this is expected," said Rush Benton, senior director of strategic wealth at Captrust.

"Most of the transactions are taking place because you have aging owners of advisory firms," Mr. Benton said. "If I owned a business and was thinking of retiring and the value of that business was very closely related to the level of the markets, I'd be thinking about selling."

Of course, most deals involving registered investment advisers take months to pull off, rather than being knee-jerk reactions to stock market volatility.

But Mr. Benton and others believe a lot of owners have been preparing for exactly this kind of environment so they can sell high before the market brings RIA valuations down.

"The flat market with more volatility is causing some sellers to move from a position of 'Let's maybe do a deal' to 'We better do our deal,'" said Daniel Seivert, chief executive officer at the investment bank Echelon Partners.

"There is more competition for deals, which is causing buyers to up their game and offer better terms for sellers, including more money down, higher valuations and more attractive terms," Mr. Seivert said.

Mercer Advisors, a $15 billion consolidator with 36 offices, is fully embracing the current land-grab mentality, having announced four acquisitions so far this month.

"We're in a very frothy M&A market with lots of buyers snapping up firms and driving up valuations," said Mercer vice chairman David Barton.

"Smaller firms have a decision to make, they can either build it to grow or join a larger firm," Mr. Barton said. "The unprecedented valuations are pushing owners to the center of the poker table."

Mr. Benton said veteran advisory firm owners are motivated by memories of the 2008 financial crisis, which drove down RIA valuations.

As fee-based businesses, RIAs' valuations are closely linked to market performance, especially when about a third of firms' annual asset growth has been attributed to market performance.

"I saw firms that were close to the finish line [of closing a deal] in 2008 and 2009, then the market collapsed, and it took five years to get back to the same valuation levels," Mr. Benton said.

And waiting five years for a market rebound can pose a problem for older advisers, because it could mean that when they sell, they won't be sticking around as long under the new owners.

"We like buying businesses where the principals still have some gas in the tank, and the sellers know that, too," Mr. Benton said.

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