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What's driving value in the booming 401(k) adviser M&A market?

Many advisers fear missing out as they see their peers get historically high multiples

Sep 12, 2019 @ 8:47 am

By Fred Barstein

When asked what drives value for retirement plan practices, Dick Darian, CEO of consulting firm Wise Rhino Group, replied: "Financials, financials, financials."

"Like location with real estate, free cash flow or EBITDA has the greatest impact on value," Mr. Darian said, referring to earnings before interest, taxes, depreciation and amortization.

With demand growing for large, profitable retirement plan advisory practices as defined-contribution plans and retirement take center stage, more advisers than ever are considering selling. Around 80 million baby boomers will retire over the next 20 years, and millennials will rely almost exclusively on DC plans for their retirement.

In addition to a firm's financials, Mr. Darian noted that size and trend lines will affect value.

"Buyers pay more for larger practices," he said. "But they also want to see consistent and significant growth over the last three to five years."

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Other factors include: leadership; reputation and brand; diversity of revenue, with fee-based business valued higher; recurring revenue; staff quality; age of leaders; and specialties like nonqualified plans.

With pressure on margins, plan advisers are being asked to do more for the same price. Most elite plan advisers are adding wealth management but few have created an integrated business with a proven track record.

The shift from offering advice services for C-suite executives to providing those services for the broader participant population requires investing in technology and in people to provide the advice. The acquirer may either have those resources or can provide the necessary capital to build those capabilities.

The valuation of firms like Financial Engines, which has shown the ability to monetize participants at scale, dwarf even the largest plan adviser practices. Private-equity firm Hellman & Friedman bought the managed-account provider last year for more than $3 billion.

Add in the aging of advisers nervous about the economy and a long-running bull market and it's no wonder that more practices are going to market or thinking about doing so. Many advisers fear missing out as they see colleagues like Sheridan Road Financial and Centurion Group get historically high multiples.

Buyers like Hub International see the convergence of retirement, employee benefits and wealth management. With the benefit-broker M&A market in the late innings, it's causing similar shops to look for new markets to sustain ambitious growth targets required by their private equity owners.

The plan-adviser market has a very defined food chain. The 10 or so large RIA aggregators, some of which are private-equity funded, are either buying or recruiting specialists or regional firms which, in turn, would like to tuck in the smaller retirement practices of dabblers focused on wealth management.

So is now the time to sell? Beyond financials and valuation, advisers need to decide if they want to become an employee after decades of controlling their own destiny.

Rick Shoff, managing director at Captrust, notes that culture is often overlooked as a determining factor for both the buyer and seller.

Mr. Darian said many advisers are looking to conduct an assessment of their retirement plan practices and determine what holes exist and whether they should go to market now or fix the issues.

"Value of retirement practices will never be higher," he said. "Many larger practices are facing tough, generational decisions."

We should all have these problems.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews'Retirement Plan Adviser newsletter.

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