What drives value for RPA firms?

Retirement plan advisory firm valuations are at an all-time high and the number of deals is skyrocketing, leading many RPAs to ponder, “What are the drivers of value?”

At the Sept. 9 RPA Valuation workshop, led by Dick Darian, CEO and founder of the Wise Rhino Group, two esteemed panels of DC aggregators and providers addressed this question, as well as how RPAs can build the desired services.

Though multiples have been rising for RPA firms, ranging from eight to over 10 times profits — and even more with an earnout — Darian thinks we may have reached a peak. The demand and supply sides have reached equilibrium, and many of the top aggregators have achieved scale, he said.

On the other hand, the number of deals will grow, with a high of 67 expected in 2021, compared to just 32 in in 2020 and a mere eight deals in 2017, Darian said. The dramatic increases have been driven in part by new buyers like Edelman Financial Engines, PNC, Morgan Stanley and private equity firms, as RPAs look to mitigate risk and collaborate in a post-Covid world.

The primary drivers of valuation start with a healthy growth trend of recurring revenue and earnings before interest, taxes, depreciation and amortization, not concentrated on a few clients. The breadth of services, including types of plans and participant services, is key. But a firm's leadership, team and next-gen staffers are critical to buyers, said Darian, who has done almost 50 deals in the last three years.

The aggregators on the first panel consisted of the leading and most active firms, including Hub International, MMA Retirement, NFP Retirement and SageView. Echoing many of the themes raised by Darian, the panel focused more on people and relationships.

Nick Della Vedova, president of NFP, said the company looks for firms where it can accelerate growth, as well as those in locations where NFP has a strong benefits or property and casualty practice. Thought leadership and fit with Hub are key to Joe DeNoyior, president of retirement and private wealth, while Jeremy Holly, chief development officer at SageView, said the firm has looked closely at talent in the staff. Craig Reid, national practice leader at MMA Retirement, said culture fit,  partnership and integration with the company are keys to success.

Conducting a SWOT analysis — strengths, weaknesses, opportunities and threats — to understand weaknesses and strengths of the firm was essential to Joe as he transitioned his firm from a practice into a business. The days of not interacting with the participant are over, Della Vedova said. Indeed, more plan sponsors are asking for participant help, Holly noted. With plan fees dropping, Darian said that the key to sustainable growth will be servicing participants.

As a result, RPAs with strong wealth management businesses and leadership will command a premium price.

RPAs that are thinking of partnering with a larger firm should talk to other firms that have sold to that organization, Reid said, noting that RPAs also need to spend time with the people they will be working with.

The second panel, which focused on how RPAs can partner with providers to build value, included leaders from Gallagher, John Hancock Retirement, Principal Financial and Transamerica Retirement. The providers were selected based on their history of strong partnership with RPAs.

Bill Thompson, divisional vice president at John Hancock Retirement, cautioned RPAs to evaluate which record keepers are true partners, especially when it comes to participant services, and said that could be determined in part by whether they are willing to share data. Principal Financial head of sales Scott Boyd noted that most RPAs work with many providers, which can lead to inefficiencies, especially if they aren't true partners and have competing interests. He also cautioned that RPAs shouldn't lose the efficiencies that have been created by the pandemic, like virtual group and one-on-one meetings.

Defining rules of engagement with providers is critical, although there are many instances when they are not followed said John Jurik, national practice leader at Gallagher, who looks to help his advisers leverage their massive wellness capabilities.

Brian Walker, national sales manager at Transamerica Retirement, noted that there are many instances of RPAs leveraging Transamerica’s resources, such as identifying why participants take loans and hardship withdrawals, to devise a potential solution.

Della Vedova said that RPAs need to invest in their businesses, especially marketing, while Holly noted that RPAs should be developing talent. Being a student of the business, creating a business plan and thinking like a buyer are critical, Darian said.

Whether RPAs are looking to sell or not, they should always be ready, because an uncontrollable event could accelerate the timeline, he said. And understanding the key drivers of valuation will provide a solid road map.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.