Financial advisors are witnessing a significant shift in the wealth management industry, with many considering or making moves to new firms. In such transitions, one crucial aspect to consider is the valuation of an advisory practice. Recently, eye-catching figures have been thrown around, exemplified by Focus Financial Partners going private for a staggering $7 billion, CI Financial monetizing their business stake at $5 billion, Robertson Stephens marching towards a $10 billion valuation, and Beacon Pointe’s partnership with KKR exceeding $1 billion.
Roger Gershman who counsels advisors on valuations from The Gershman Group stated, “we’re seeing more consideration for going independent now that the dust is settling after JPMorgan Chase’s acquisition of First Republic Bank. Advisors don’t like big firms telling them what to do and how, and beyond, have a keen eye towards valuations given the shake up that’s going on in the industry. We anticipate much more movement towards independence over the next few years.”
But how can advisors determine the true value of their businesses in a meaningful way? The aforementioned success stories have undoubtedly capitalized on both organic and inorganic growth, supported by compelling data, which has attracted bullish buyers. For instance, Robertson Stephens has rejected offers, driven by their ambition to build something even greater and more noble. As an advisor, is it possible to aspire to such levels of success? Undoubtedly, it depends on combining exceptional client service, effective recruitment, and strategic growth initiatives.
Is it possible for an advisor at a traditional brokerage firm to secure such a deal? How Can a practice maximize its potential within a large broker dealer? The answer lies in independence, which explains why advisors have been leaving big wirehouses over the past decade to establish their own Registered Investment Advisors (RIAs). Practices are now being sold for exorbitant sums. Corient Capital, led by former Merrill Lynch advisors, sold their $5 billion RIA to CI Financial in 2022, commanding an astronomical valuation. Similarly, Alan Zafran, Eric Harrison, and Rob Skinner, ex-Merrill Lynch and First Republic advisors, grew their California-based practice, IEQ Capital, within 4 years to $18 billion and partnered with Stone Point Capital in 2023.
Why would someone decline a retention deal that offers a 275% premium? What rationale could justify relinquishing a retire-in-place program without the hassle of transitioning? How can a business be structured to maximize its valuation? How can an independent firm determine its worth?
If an advisor retires his $5 million book at this current wirehouse firm, he or she can expect to get payout anywhere from $5 million to $13.75 million, depending on that particular firm’s client transition program.
Now let’s consider that same $5 million as a business that, in its current state with zero growth over a 5-year period, would conservatively generate $3 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) distributed to the owners. If this business were to be sold, assuming a market rate multiple of 9x for a business of this size, its valuation would reach $27 million.
Now, if we assume that the same $5 million team grows at a compound annual growth rate (CAGR) of 10% over 5 years, doubling its EBITDA, and elevating the multiple to a conservative 11x instead of 9x, the overall value of the business nearly doubles.
Let’s take it a step further. If we apply the same 10% CAGR over 5 years, along with acquiring a $2 million practice in year 5, the increased scale of the business impacts its overall enterprise value. With a conservative multiple of 12x applied to EBITDA, the business would be valued at $54 million or more.
Advisors often depart from large wirehouses due to bureaucracy and a desire for greater control. They seek to foster growth, potentially through mergers, and a combination of organic and inorganic expansion to position their firms for the highest possible valuation. Selling a RIA moves the practice into long-term capital gains territory, and the advisor gains the ability to choose the buyer, customize the terms, and offering an optimal transition solution. Clearly, expanding bandwidth, as demonstrated by the aforementioned figures, significantly enhances valuation, paving the way for a successful sale.
As the Editor of The Gershman Group, a boutique financial services consulting firm, TGG brings expertise in financial analysis, strategic planning, and market research. With a keen eye for detail and a passion for helping businesses navigate complex financial landscapes, TGG delivers insightful, high-quality content to empower informed decisions. Backed by years of industry experience, TGG makes complex topics accessible through clear and compelling communication, shaping the firm’s thought leadership and commitment to excellence in financial services.
