RIA valuations are up but hitting a plateau: Fidelity

Even with RIA firms getting more expensive to buy, the industry doesn't foresee a slowdown in registered investment advisor dealmaking in the next five years, according to a new study by Fidelity Investments.

Owners of registered investment advisors want higher prices for their firms now than they did between 2017 and 2019, the last time Fidelity did this study. The cash flow metric EBITDA, or earnings before interest, tax, depreciation and amortization, is a common valuation multiple used in RIA transactions. RIA firms have recently routinely been valued at multiples in the neighborhood of eight times EBITDA, but in the recent sellers’ market, higher multiples have been cited.

Fidelity's report, the 2023 M&A Valuation & Deal Structure Survey, buttresses that notion.

From January 2020 through this March, the median EBITDA multiple for firms increased from 7 times EBITDA to 9 times, with sellers’ expected EBITDA multiples rising from 9 times to 11 times EBITDA in the past three years, according to Fidelity.

Drivers of this increase in the EBITDA multiple include high organic growth, young and aggressive next-generation leadership, and a key geographical footprint, according to Fidelity.

"EBITDA is a cash flow-based metric," said Laura Delaney, Fidelity's vice president of practice management and consulting, who joined the company last year from rival RIA custodian Pershing. "The price has gone up two turns, or 200%, but multiples right now are plateauing for the high-quality firms."

Not all firms are valued in the same way, she noted. RIA firms that face potential hurdles, such as not having a leadership succession plan or strong management team or relying on one large client, receive lower offers.

The type of RIA that's most valuable right now possesses a strong management team and good business development culture, and is looking at the next generation of investors and incorporating them into the client mix, Delaney said.

From January 2020 to this March, Fidelity counted 492 reported transactions, up from 146 during the 2017- 2019 period, according to the survey. Buyers reported larger deals compared to the previous study period, with the median assets under management of acquired firms increasing from $250 million to $400 million.

The study surveyed serial acquirers that were involved in nearly 500 deals over the last three years and accounted for almost 75% of all RIA transactions identified by Fidelity over that time.

And many buyers of RIAs intend to continue to buy, even in an environment with rising interest rates making potential deals more costly.

"It was interesting to see that three out of five [buyers] are planning to do more deals," Delaney said. "That speaks to the fragmentation of the RIA industry. There are still private equity buyers investing for the first time. There's lots of runway ahead."

[More: How high can RIA valuations go?]