Valuation Forecast: What increased marketplace competition means for the value of your advisory practice

Fee compression, increased regulation, and competition through digital advisors are all threats to the independent financial advisor and RIA. Over the next decade we will see a large number of practices being sold or retired, greatly reducing the number of outstanding firms. With this competition on the marketplace, will the average financial advisor see their practice value increase or decrease?

Valuations in the industry have been confronted with two major limitations; client age and the current industry deal structure. The majority of wealth management firms possess a variety of actively engaged 55-62 year old clients. Many practices can tip the mean client age closer to 70. If the average American life expectancy is between 77-82, then acquiring a practice of clients can have between 7-10 years before the client’s portfolio converts to a depreciating asset based on drawdown.

Using the typical deal structure that has a seller financed note and thin profit margin to the buyer over 5-6 years, the buyer experiences 3-5 years of good profits before that acquisition could potentially decline in revenue. While many advisors acquire for not only the existing client base, but the opportunity to earn referrals and expand their network, it can still seem like a daunting and less than profitable expenditure to take.

There is change on the horizon however, as deal structure continues to evolve and improve. With capital being a contributing limitation to valuations, an increase in access to capital should have a net positive impact on the industry. Buyers, through the assistance of firms like SkyView Partners, are able to access conventional commercial loans to create larger upfront payments on the business and widen the cash flow margins in both the short and long-term.