Jun 20, 2019

The State of the Financial Management Industry: How the Landscape is Changing

From mergers to limited partnerships to outright acquisitions, the ownership structures of the advisory sector are evolving like we’ve never seen before.

Case in point, just look at, not only the amount of recent deals, but the various unique types of deals throughout our industry just in the last few months. After its IPO, Focus Financial is now a publicly traded company. Goldman Sachs has acquired United Capital. Financial Engines, Ric Edelman, and the Mutual Fund Store are now all one big firm.

These three unique transactions represent just a fraction of the changes that are forever altering the traditional ownership structure within our industry right now.

So, what exactly is going on?

Aside Focus Financial, which is a quasi-holding company with a stake in almost 60 independent advisory firms, a big reason for the selling frenzy seems to be that the long bull market has pushed AUM (and with them, valuations) higher and higher. In other words, it’s a seller’s market.

Another reason for all the movement is that, as with Goldman Sachs’ purchase of United Capital, large, national companies are looking to get into this potentially profitable space.

And, yet, still another motivator for several recent transactions is the influx of private equity investment, which is increasing competition and driving prices even higher.

A strong economy, a bull market, new players in the space and an influx of private equity, if you’re the principal of a firm you need to pay attention because, according to industry experts, this could well be a perfect storm that won’t last long.

Because it’s not just the big guys getting bigger, though United Capital did sell for a whopping 17 times EBITDA (earnings before interest, taxes, depreciation and amortization), it’s the smaller guys getting offers that are two-or-three-times EBITDA, or more.

So, when you consider the large number of smaller, individual transactions—the ones that don’t make big headlines—at their core, are these mergers and acquisitions just the same old story of super successful large companies gobbling up super successful smaller ones?

Not necessarily.

A big part of our industry is still smaller “mom and pop” shops, which are increasingly operated by older principals (compared to most other industries). That means lots of mature advisory firms have topped out, stagnated and stopped growing; though their ownership structures have remained unchanged, possibly for decades. So, while on the one hand you have some firms that have realized they need an infusion of new ideas and capital, on the other hand you have many older advisors who are looking to cash out and retire.

All of this has contributed to a noticeable increase in deals, which includes some firms that have thrown their hats into the ring and ended up selling merely because they’ve received offers that were just too good to refuse.

If you’re the principal of a firm and the evolution toward consolidation either makes you anxious or excited (or a combination of the two), what should you do to make sure you clearly understand what your options are (or could be) in the current sellers’ climate?

On the first episode of the State of the Industry podcastScott Hanson, co-founder and senior partner of Allworth Financial (formerly Hanson McClain), an advisory firm with more than $4 billion under management, welcomes Chip Roame, managing partner of Tiburon Strategic Advisors, Andrew Dodson, a private equity investor, and, finally, David DeVoe, an investment banker (who was recently called the “mergers and acquisitions guru” by Barron’s magazine), to the program.

These four come together to give listeners a highly-informed perspective into, not only the current tidal wave of change that is sweeping over the planning and investment sector, but what advisors of all shapes and sizes need to understand about specific ownership trends and challenges that may be lurking up ahead. 

Click here to listen to the full episode.