With recent advisor surveys suggesting that as many as 1-in-5 financial advisors could leave the industry in the wake of the DoL fiduciary rule, the potential arises that there will soon be a wave of advisory firms looking to sell. For those who are thinking about selling, this suggests there may be a race to get out the door first, before the glut of sellers causes advisory firm valuations to crash. And woe to the advisor who was “coincidentally” planning to sell and retire in the coming years.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I explore the potential consequences of financial advisors leaving the industry after the DoL fiduciary rule takes effect, and how the transition to a fiduciary world could actually lead to an increase in advisory firm valuations, not a crash.
The reason is that despite the fiduciary fears, RIA firms that operate as fiduciaries – typically operating as a level fee fiduciary with an AUM fee structure – actually already sell for an average price around two times revenue, while the traditional commission-based firm only sells for around one times trailing revenue. In other words, despite all the fiduciary fears, the reality for the past decade is that fiduciary AUM firms already sell for double the typical valuation of a commission-based firm!
In addition, the reality is that there’s such a massive number of buyers for every sellers, that even a big uptick in sellers may do little to impact the current seller’s market. Because not only is there an estimated 50:1 ratio of buyers to sellers, but most buyers are large firms looking to buy several others, while most of the sellers are solo or “smaller” multi-advisor firms. Which means the ratio of the amount of capital to buy advisory firms, compared to the value available to sell, could be more like 100:1 or 200:1 or more… which is ample pent up demand to absorb a DoL fiduciary seller’s wave.
Of course, the reality is that selling a commission-based firm in the face of DoL fiduciary will still have limited value, simply because commission-based firms don’t sell for as much in the first place, and may be even less appealing as the DoL rules make them harder to operate. And the push for more commission-based firms to shift to the AUM model as level fee fiduciaries, and then provide ongoing financial planning to justify their valuation, could accentuate the crisis of differentiation and push firms to reinvest even more in their advisors and services to compete (which can compress profit margins and ultimately bring valuations down slightly).
Nonetheless, the reality is that the marketplace has actually already judged level fee fiduciary AUM firms to be more valuable than commission-based firms, and if 20% of financial advisors really do leave after DoL fiduciary, that just makes more clients available for those who remain behind. Which means in the long run, not only may DoL fiduciary not impair advisory firm valuation multiples, it could leave the fiduciary survivors with an even larger business than they ever had before!