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Kitces Weekend Reading for Financial Planners (Dec 12-13)

Article Featured in Nerd's Eye View on kitces.com on December 11, 2020 by Michael Kitces

In this weekends Nerd's Eye View, Michael Kitces shared a handful of articles surrounding the theme of succession planning, and with them, shared TruClarity President & COO Shad Besikof's Succession Planning Strategy article. Kitces shared the following:

The market for mergers and acquisitions of RIAs continues to heat up in recent years, from high-profile deals like Goldman Sachs acquiring United Capital for $750M in cash, to a recent analysis by Advisor Growth Strategies showing the EBITDA multiple paid for advisory firms has risen nearly 29% over just the past year (to 6.6X, up from 5.1X in the 2015-2018 time period), and after a brief pause in the first half of the year (due to the pandemic) deal volume for RIAs continues on a record-setting pace for 2020. Yet advisors who work at broker-dealers do not necessarily have the opportunity to participate in the same economics, lacking an independent legal advisory business entity they can actually sell, and the reality that legally “their” clients are actually clients of the broker-dealer. Of course, many broker-dealers recognize this risk and have created their own internal buyout programs, which a few years ago were quite generous (reaching as high as almost 3X revenue when RIAs were more commonly selling for 2X), but competition and declining margins amongst broker-dealers have reversed this balance, with broker-dealer (particularly wirehouse) transition programs declining to ‘just’ 1.5X – 2X trailing 12-month revenue and often paid out over 5 years, while multiples for larger RIAs are increasingly rising above the 2X revenue multiple and as much as 2/3rds or more upfront (as opposed to a broker-dealer 5-year earn-out/payout), in addition to the fact that at least part of the RIA acquisition deal is often eligible for capital gains treatment (while broker-dealer transitions are virtually always 100% ordinary income). As a result, advisors at broker-dealers eyeing retirement in 5+ years are increasingly looking at a transition to the RIA channel as an exit strategy, to set up for a future sale with more favorable terms.