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Independent Advisory Firms Have Choices to Make: Fidelity's Slater

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Independent financial advisory firms constitute the fastest growing segment of the industry, but they face multiple pressures as the industry changes.

Among those changes: a greater concentration of assets at the largest firms — which intensifies competition — and a growing presence of private equity funding looking to invest in or acquire firms.

“The independent model is facing pressures to change,” said Scott Slater, vice president of practice management and consulting at Fidelity.

Speaking to a room filled with independent advisors at this week’s Fidelity 2018 Inside Track conference in New York, Slater described an industry that accounts for almost 60% of financial advisory firms and consists of RIAs, hybrid RIAs and independent broker-dealers.

Roughly three-quarters of the firms manage $100 million or less and control 10% of assets, 17% manage between $100 million and $500 million and oversee 20% of assets and 6% manage more than $500 million (including 4% who manage more than $1 billion) and control 70% of assets.

“It will be very hard to be in the middle,” said Slater. “The most successful firms will collaborate.”

He proceeded to explain the multiple options that firms can choose if they decide to collaborate —  options Fidelity identifies as distinct RIA acquirer models — providing examples of each:

  • Integration Platform Provider (Dynasty Financial Partners)
  • Passive Investor (Fiduciary Network)
  • Financial Acquirer (Wealth Partners Capital Group)
  • Strategic Aggregator (Focus Financial)
  • Branded Acquirer (Beacon Point, HighTower Partners and United Capital)
  • Wealth Management RIA Acquirer (ACG Wealth, Atlantic Trust and Wescott Financial Advisory Group)

“There are more options today for advisors to choose where their independence goes,” said Slater. He advised firms to prepare for the future.

“Know where you are in the business cycle, in your personal life cycle and where you want to be in three to five years,” said Slater. “What are you trying to build? How big do you want to be? Do you want to be a seller or a buyer?”

Doing nothing is not a good option, according to Slater. “Inertia will lead to the very loss of independence you value.”

He noted that despite the talk of a seller’s market for RIAs, the buyers are very experienced and will be discriminatory.

They are doing deals based on earnings multiples, not revenue multiples, and the multiples increase as the earnings do, said Slater. They range from five to seven times earnings for firms with less than $250 million in assets to eight to 12 times earnings for firms with more than $2 billion in assets.

“Ultimately size drives multiples,” Slater said. In addition, buyers are looking at earnings growth rate, client demographics — setting lower multiples for firms heavy with older clients — talent, technology and operations platforms.

Buyers are not that interested in undervalued firms that require investment to get into shape, Slater said.

He recommended that potential sellers achieve scale, reduce costs and upgrade their talent and client experience model if they want to optimize their value in a deal. In addition, sellers should define their culture and know what they want to preserve in a deal. “If you get your culture right, you’ll be fine,” Slater said.

And if a deal ultimately gets done, he said, expect to receive one-third to one-half the value in cash up front and to remain with the firm for the next three to five years.


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