As the financial advisory space ramps up for another year of anticipated record merger and acquisition activity, it is worth pondering whether advisory firms could benefit from a Zillow-like model for valuing the firms making up the fragmented industry.
While the naysayers insist a
Zillow-type database, which compiles publicly-available data to estimate real estate prices, would fall short in the RIA space, some argue it is only a matter of time.
"It's certainly an idea that has been kicked around, but the general view is that there are so many variables in valuing an RIA that it would be really difficult to have any kind of formulaic number for firms," said Rush Benton, senior director of strategic wealth at CAPTRUST, which made eight acquisitions in 2017.
He added that a Zillow-type database, which gives buyers and sellers a general idea of where a real estate property is valued, "would not be good for this industry, because it would set expectations that are either too high or too low, and usually too high."
Meanwhile, David Canter, head of the RIA segment at Fidelity Clearing & Custody Solutions, believes the financial advice industry "needs a Zillow to establish a base line for firm value."
RIA ESTIMATES
Similar to the way Zillow generates its "Zestimates" based on a property's location, square footage, age, and various amenities, Mr. Canter said the value of an RIA could be estimated based on factors including assets under management, profitability, organic growth rates, talent profile, client profile, geography, special niche, and ownership structure.
"The price estimate may be higher than the buyer is willing to pay for the firm, so negotiations could ensue, ultimately allowing for the publishing of the actual sale price of a firm," Mr. Canter said. "Most importantly, a tool like this would demonstrate that there is a moment when a firm reaches optimal value and should think about selling. Otherwise, like a house, the entity could quickly lose value."
There's no denying that valuing an RIA is often more art than science, but the advisory space appears to be thirsting for some kind of hard numbers, or at least a starting point when it comes to valuations.
And with the
private equity industry pushing more aggressively into the RIA space as one of the hottest investments around, advisory firm owners could increasingly be at the mercy of the more sophisticated investors.
Speaking at The MarketCounsel Summit in Miami earlier this month, Rich Gill, a partner at Wealth Partners
Capital Group, said the RIA space is "suddenly incredibly fashionable."
He warned advisory firm owners to "look in the mirror and decide what you want from a relationship with an outside investor," and added that the industry joke is if an RIA "lets the buyer set the terms, you can have any multiple you want."
The point is underscored by Mr. Canter's insistence that "there is a critical need for seller education."
DATA SHORTAGE
Despite public registration at the state and federal levels, David DeVoe, managing partner of RIA consulting firm DeVoe & Co., said there is not yet enough available information to accurately value an advisory firm the same way real estate is valued.
"You can't go to a resource and determine what the profit margin is of Firm A versus Firm B, which is three doors down on the same floor," he said. "You don't even know the number of employees, much less the revenue, revenue growth rate, profit trend or percentage, completion of clients, whether they have non-competes; it's all private information."
Mr. DeVoe added that Zilliow estimates are "notably high in some places and low in others, to the tune of 15%, plus or minus."
"Zillow can be valuable to have a sense of what a neighborhood or house is worth, but no one would ever interact on that value," he said. "They would need to get inside, see the interior, walk the layout, and have it inspected."
But citing the general valuation starting point of two-times revenue, Mr. DeVoe quipped that "RIA Zillow already exists, which is inaccurate, dangerous and irresponsible."
But even Mr. Benton of CAPTRUST, who sees a lot obstacles ahead for anything like a Zillow for RIAs, said the currently available variables could generate "ballpark-like values" for RIAs, which would essentially be the starting point the market is looking for.
"It could be done, but I'm not sure what value it creates for the RIA owner," he added. "I can tell you as a buyer, we don't really spend a lot of time parsing out how old the client base is and how many are between $1 million and $5 million accounts; we determine if a firm is a grower by looking at the data, including client inflows and outflows."
