Mark Hurley Speaks--Again

Not only do these players have trouble generating resources to grow. They also face rising spending on compliance and marketing and upward pressure on staff salaries, the result of a shortage of trained professionals in an industry that is rapidly graying. Indeed, the study points out that just 18% of the Financial Planning Association’s members are under 39 and only 3% are under 30. But with banks and trust companies, among others, vying for trained financial planners to work with clients, salaries are rising steeply. Between 2001 and 2003, average financial planner compensation has increased by nearly a third, to $99,000, the study says. These rising costs have pushed the average RIA firm’s operating profit margins fell to 16.6% in 2003 from 21% during the bull market year of 1999.

For advisors hoping to sell out, Hurley identifies three potential classes of buyers: employees, financial buyers including National Financial Partners, and strategic acquirers, such as banks and insurers. Advisors who sell to employees “won’t get a lot of money,” Hurley contends, while sales to financial buyers may provide buyers with liquidity but “really don’t add any value” to a firm. In addition, he says, “two-thirds of the economics” of such a sale “end up in the hands of the buyer.” Sellers looking for strategic buyers, meanwhile, may be disappointed. While these purchasers typically pay high prices, few RIA businesses are big enough to make attractive targets. Indeed, smaller RIAs will fare worst in the mergers-and-acquisition game, Hurley says, noting that few of these practices have been acquired so far.

Hurley suggests that custodial firms may soon enter the marketplace as buyers of RIA practices. As advisors shift their mutual fund business to transfer agents and away from custodians’ profitable fund supermarkets, he believes, the custodians will act in their own interest to keep more assets from departing.