On Tuesday Mark Tibergien, president of Pershing Advisor Solutions, asked a room of some 85 advisors representing about $30 billion in assets how many were considering mergers or acquisitions. About half the crowd raised their hands.
Not too surprising. The average age of advisors is around the mid-50s, and people start thinking about planning for retirement and business exit strategies at that time. Registered investment advisor mergers hit a record last year. But Tibergien raised some issues in his talk that are bound to give pause to potential sellers.
Too many advisors see successful practice planning as a career endgame that allows them to sell and move on. That’s the wrong way to look at it, Tibergien told the advisors, who had gathered to hear him talk at Pershing’s Practice Management Forum on “Creating Growth Through Organic and Inorganic Solutions.” The key to successfully selling practices is to focus on growth strategies, he said. A business, after all, is similar to a stock; its value depends on future prospects, not what its past performance looked like.
There should be plenty of room for growth, as demand is set to outstrip supply. The U.S. population of 310,000 advisors, about 15 percent of whom are RIAs, is shrinking at a time when the client base is growing, Tibergien said. But there’s pressure on practice valuations, he added. Operating profits, which normally benchmark at 25 percent, are closer to 8 to 10 percent today, resulting from higher overhead and professional staff costs, he said.
An apostle for practice efficiency, Tibergien outlined reasons why the bottom line is falling. It starts off with poor pricing; advisors are not charging enough for their services, he said. Seventy percent of advisor practices are solo operations, a dynamic that raises productivity issues—some advisors have too many clients, and solo practictioners have to serve as both advisors and managers, running the risk of performing poorly at one role or the other. Client mix can be problematic. If 80 percent of your clients account for just 20 percent of your profits, you may be deploying staff in the wrong places, Tibergien said.
Some advisors have the wrong idea about staffing, he added. There’s a great hunt for experienced people; Tibergien estimates the RIA channel will need 9,000 more financial professionals in the next five years. But some practices are looking outside for that talent, rather than cultivating it within their existing staff. It takes 18 to 24 months for a new worker to become fully productive, Tibergien said. He recalled one advisor telling him he had been seeking the right person for five years; couldn’t that time have been better spent training an employee who is already on the payroll and committed to your office culture? “That’s the challenge I think this business is facing—our unwillingness to invest in and develop new talent,” he said. “If your sole focus is on mergers, acquisitions and recruitment of experienced talent, then your cost of doing business will go up quite a bit.”
RIAs are increasingly being bought by other RIAs, according to a Pershing report. Practice sales deals have grown smaller in size in recent years. Last year, RIAs with less than $100 million in revenue accounted for 18 percent of firms sold or merged; that’s twice the percentage of same-size firms in deals from 2004 to 2009. The median AUM of acquired RIAs last year was $400 million—15 percent less than in 2009, and the lowest median AUM in the last 10 years. Tibergien said he sees price multiples of 4 to 6 times EBITDA on firms with less than $500 million in assets, and multiples of 7 to 9 times EBITDA on firms with more than $1 billion in assets. Don’t use such numbers as rules of thumb, he cautioned. Multiples are just a starting point in a calculation that also considers how much a practice can grow.