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RIA Edge panel valuations Photo by Ledd Lens LLC
Merit Financial Advisors President Kay Lynn Mayhue; Edelman Financial Engines' Denitsa Balunis and Turkey Hill Management founder Jessica Polito discuss RIA valuations at RIA Edge.

RIA Edge: Private Equity Keeps Valuations Riding High

Private equity money continues to fund inorganic growth for its chosen firms, and with more buyers comes more competition, according to panelists at RIA Edge.

Despite the rush of potential sellers into the RIA M&A space, valuations remain high, as private equity firms continue to enter the space. 

“Private equity has entered the chat,” according to Jessica Polito, the founder of Turkey Hill Management, which offers M&A advice for wealth management firms on the selling side.

Polito and others took the stage at RIA Edge, part of Wealth Management EDGE at The Diplomat Beach Resort in Hollywood Beach, Fla., on Tuesday to discuss valuations in the RIA space, one of several afternoon sessions charting a firm’s life span (and how to make it valuable for buyers), from organic growth development to succession planning.

According to Polito, the market is currently in a cycle in which private equity dollars are finding firms succeeding in organic growth, giving them money to move into M&A, and subsequently pushing (and keeping) valuations higher.

“Private equity likes to make money on investments, so they’re not going to sell their firms for a loss,” she said. “They’ll continue to funnel money into them to do acquisitions, and because there are more buyers out there, there’s competition, and competition requires you to pay market multiples, and market multiples will remain high because there’s competition.”

For Merit Financial Advisors President Kay Lynn Mayhue, valuations stayed high because of supply and demand, with a marked change in the industry from 10 years ago. At that time, she said, the number of “smart dollars” funding industry players was far lower.

“Now we’ve got strategic investors, we’ve got PE money, and a lot of people finally seeing our industry and our business as a noble profession, which it is,” she said.

In the first quarter 2024, private equity was involved in nearly 70% of RIA transactions, and it contributed to over $200 billion in assets transacted, according to Echelon Partners.

According to Denitsa Balunis, a senior vice president, corporate strategy and development and chief of staff to the CEO at Edelman Financial Engines, PE’s interest in the space seemed straightforward; RIAs are a “sticky business” that can generate cash via fees even during market downturns.

However, PE firms want to see actual organic growth (via net new clients and assets) and second generation succession planning when scoping out prospects, according to panelists on the afternoon’s other panels. 

Several months into her new role as Chief Growth Officer at RFG Advisory, Abby Salameh said it’s crucial for firms to designate a “quantitative” growth target. She said RFG would even do the marketing for the firms partnering with them to boost lead generation because without that effort, “it may or may not get done.” She also said many “amazing” marketers at RIA firms take on the role without the title.

“I think for a certain size firm, that’s probably adequate, but after a certain size, you need to institutionalize and professionalize the business,” she said.

Potential buyers would also be looking for succession plans, but those are a “nonexistent feature” in most firms; according to Mary Kate Gulick, CMO and head of marketing and public relations services at FiComm, less than 40% of firms had one in place, whether because of the effort involved or because the firm’s leaders don’t want to consider it.

Additionally, according to Shauna Mace, the head of practice management at SEI, 85% of growth at firms is from lead advisors and founders, which she said would be problematic for any firm’s future. However, she felt optimistic about the marketing understanding of the generations rising into the workplace.

“We kind of have to get out of the way, and let this next generation coming up to be these leaders, let them do some of these activities,” she said. “Because they’re capable of it, but they’re not going to do it if they don’t have the opportunity and support, and expectation of that being part of their responsibilities.”

But what would actually drive firms’ valuations (and dealmaking in general) downward? To Polito, it would have to be something like a “sustained market downturn” or a hike in interest rates that made offering equity impossible.

“There’d have to be something monumental that would affect much more than just the wealth management space,” she said. “It would have to be something that depresses the country."

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