In 5 years, advice industry sees $835.3 billion in assets change hands: LPL

The welcome news for financial advisors in the report is that valuations for firms aren't necessarily based on how they choose to do business.

InvestmentNews and other trade publications write almost every day about the deal frenzy that has gripped registered investment advisor firms and more broadly, the wealth management industry. But from time to time it’s illuminating to take a step back and look at the scope of the dealmaking, which has grown from 65 transactions in 2016 to 229 last year, according to a new report sponsored by LPL Financial and written by consultant Advisor Growth Strategies.

From 2016 to 2021, investors, dubbed “capital providers” in the LPL report, have invested significant capital in wealth management firms, leading to a variety of platforms that worked with more than $835.3 billion in assets under management at the end of 2021, according to the report, which cited Cerulli research for that figure and is titled “Maximizing Independence: Valuation Myths and Realities.”

While LPL Financial underwrote the report, Advisor Growth Strategies conducted the research and compiled the data in its presentation.

RIA owners are badgered weekly with calls from investors about selling their firm, while investors are looking to capture and own the steady cash flows that RIAs generate annually. The LPL report identifies the strategic capital providers, including private equity and debt, banks, pensions and family offices, all which have made substantial recent wealth management investments.

According to the report, the welcome news for financial advisors is that valuations for firms, which often factor in the firm size, the quality of its assets and the common cash flow metric EBITDA — earnings before interest, taxes, depreciation and amortization — aren’t necessarily based on how they choose to do business. The business structure for wealth management firms doesn’t matter much in the valuation, or sale price.

While many financial advisors aren’t ready to sell their firms right away, they often do want to have some idea of the valuation of their business. What drive wealth management firms’ valuations in this market are profitability, organic growth, target client market and the team, including the next generation of advisors in the wings, according to the report.

LPL Financial has more than 21,000 affiliated advisors in its various business channels.

“Importantly, advisors should note that how they choose to affiliate with an RIA, broker-dealer, or any wealth management firm does not drastically impact business valuations,” according to the report. “For example, those considering starting their own independent RIA may want to reconsider if a major reason is to increase the valuation of their business. A thorough study of recent transactions shows no meaningful valuation differences between sellers who own an independent RIA and those who are on their firm’s corporate RIA.”

“Other perceived valuation drivers that are dispelled [in the report] include branding, technology, investment thesis and operational process,” as well as the misperception that financial advisors should run their own compliance departments, the report said. “In reality, most firms are better off relying on their RIA, broker-dealer, or wealth management firm’s expertly managed programs.”