The market for buying and selling wealth management firms remains red hot, and perhaps no better indication of such sentiment is the public market’s appetite for shares of LPL Financial Holdings, which hit record highs on Monday of $396.25 per share.
LPL Financial, a service and technology platform that works with close to 30,000 financial advisors - the great majority of whom are independent contractors - is a bellwether for the broader financial advice marketplace of registered investment advisors and broker-dealers.
In other words, as LPL goes, so goes the wealth management industry, which saw a record of mergers and acquisitions activity in the second quarter this year, according to industry consultants.
“It’s no secret that LPL is the behemoth in the IBD industry,” said Vance Barse, a financial advisor with Commonwealth Financial Network, which is being acquired by LPL Financial. “There’s never been a better time in history to sell a wealth management firm.”
“The equity markets are at all-time highs,” Barse said. “Economic growth is better than expected. And the One Big Beautiful Bill bakes a lot of optimism into the broad outlook for the economy.”
LPL Financial Holdings reports on Thursday its second quarter earnings, which will be closely watched for any information on the Commonwealth acquisition.
Brokerage stocks, which are tied at the hip to changes in interest rates and market swings, are known for their volatility. Shares of LPL Financial (ticker: LPLA) are hitting fresh highs; its recent low was last August, when its share price dropped to $187.19.
The NYSE Arca Broker-Dealers index, with the ticker .XBD, also has seen new highs, and on Friday closed at 1046.80.
“Wall street and private equity investors, along with investors in the public markets, view the wealth management space as a massive growth industry,” said Larry Roth, managing partner at RLR Strategic Partners and a longtime senior brokerage industry executive. “Individuals globally hold half the assets, and the coming mass transfer of wealth requires financial advisors.”
“Those are the macroeconomic trends,” Roth said. “As it relates to LPL, the firm is moving more assets onto its own RIA and brokerage platforms, and offering services similar to the wirehouses, which have better margins.”
The downside to the record highs in dealmaking and stock prices is the price of firms, or valuations, which some fear is getting out of reach. According to market sources, private equity buyers are paying as high as 16 to 18 times a firm’s EBITDA, or earnings before interest, taxes, depreciation and amortization, while an RIA aggregator is paying between 10 to 12 times EBITDA, a cash flow metric.
“Therefore, as valuations of U.S. wealth management firms remain at record levels, some investors may look for opportunities abroad,” according to a recent report by ECHELON Partners.
While industry statistics pointing to a succession crisis can cause alarm, advisor-owners should be free to consider a middle path between staying solo and catching the surging wave of M&A.
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