Is the 401(k) adviser M&A market about to cool down?
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The market is hot, but the balance could shift if too many advisers seek a buyer.
Is this the end of the beginning or the beginning of the end?
The retirement plan adviser mergers and acquisitions market is on fire, with some deals reaching 12 to 14 times earnings before interest, taxes, depreciation and amortization, known as EBITDA. (By comparison, buyers traditionally had been paying eight times EBITDA.) As a result, plan advisers who had been reluctant to sell and surrender their independence are coming out the woodwork to see if they can cash in.
But if too many of the estimated 2,500 elite plan advisers with more than $1 million in revenue come to market, will prices decline, with buyers becoming selective as the balance of power shifts?
Driving the valuations of plan advisers is the confluence of retirement, employee benefits and wealth management, with growing emphasis on retirement. Though companies may be more concerned about benefits, especially health care costs, employees are becoming more concerned about retirement and personal finances.
Eighty million baby boomers are expected to enter retirement in the next 20 years. Millennials, the largest sector of workers, who are expected to live longer than prior generations, will never see a pension plan and do not expect Social Security to be available when they retire, making their defined contribution plan the main retirement savings option.
DC planning has led employees to look to solve other financial solutions at work like student loan repayment. As a result, employers are leveraging worksite retirement platforms to recruit and retain workers. Advisers, retirement specialists and wealth managers with a few plans are waking up to the opportunities to offer financial planning and distribution strategies to a captive audience within their plans.
But it takes capital and tech savvy to be able to effectively leverage these opportunities, both of which are in short supply for even the most sophisticated retirement plan practices.
Firms like Hub International, an insurance brokerage owned by Hellman & Friedman (which also owns Financial Engines, Edelman Financial Services and the Mutual Fund Store) see an opportunity to cross-sell benefits to the retirement clients as well as offer retirement planning to Hub’s estimated 600,000 midmarket benefit clients.
The estimated valuations of these retirement practices reflect the anticipated cross-sell opportunities, mostly between benefits and retirement but also wealth management. Captrust has turned its focus to acquiring wealth management practices in areas where it has retirement advisers for the same reasons.
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After decades of working hard to build their practices, aging elite retirement plan advisers who have been reluctant to become an employee at an acquiring firm are beginning to consider their options. Not only is there a fear of missing out as they see colleagues cashing in, there is a concern that a market correction could deflate prices.
If elite plan advisers flood the market, buyers will focus on larger practices, especially conglomerates like Global Retirement Partners. Hub bought GRP in September for an undisclosed amount; that deal included an office of supervisory jurisdiction affiliated with broker-dealer LPL Financial and a registered investment adviser. It also included numerous elite practices that banded together to negotiate one deal (although technically there were separate transactions). Smaller practices may have to wait and may not enjoy the elevated valuations.
So, is the Hub-GRP deal the end of the beginning of the retirement plan adviser M&A market or is it the beginning of the end, giving plan advisers six to 18 months to act? Traditional buyers, who had been paying eight times EBITDA, will be unlikely to chase higher valuations while the new buyers like Hub may look to fold smaller practices into their current acquisitions at lower prices.
Timing is everything. Those that wait may look back with regret or they may be grateful that they remained independent if the acquisitions do not work out as planned. Time will tell who was right and who was wrong but, either way, cash talks loudly.
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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