WealthManagement.com: Should I Stay or Should I Go?

August 2020 By: Kristen Grau, CPA, CVA, CEPA The M&A market for Registered Investment Advisors (RIAs) was poised to be a record year in 2020 based on yearend 2019 data, with volume, valuations, and deal terms reaching all-time highs. Fast forward three months and COVID-19 has eroded most of the 2019 gains in most mar-kets, and the M&A market for advisory practices was no exception leaving many advisors reeling and re-evaluating their options and timeline. As an advisor thinking of phasing out at any point in the near future, many have found themselves balancing their original timeline with recent changes to their revenue and profitability, long-term market outlook, and their willingness to adapt to new compliance requirements such as Reg BI.   Given current market conditions, the question is, what will produce the best outcome for an exiting advisor and their clients – do they sit on the sidelines and try to time the market to maximize value, or pursue a sale today? There are a variety of reasons to delay selling:   Too much going on with the business A passion to continue serving clients The owner is in good health and not ready to give up control Unsure about post-retirement plans Concerns regarding retention of staff Concern clients won’t transition to a new advisor Concern a buyer may not deliver on the same caliber of service to clients Too much debt on the books or a forgivable loan outstanding Don’t want to have to change broker-dealers, custodians, etc. No compatible or capable buyers in the local market Value of the practice may not be high enough to retire   Whether an advisor considers delaying a sale for one or a combination of these reasons, selling the business now remains the safest option as all of the aforementioned elements are normal considerations navigated as the deal is put together. Selling now may not only be the best solution for clients and your role as a fidu-ciary, but it may also protect the seller from waiting and being exposed to changes in tax rates or an increase in the cost of capital for buyers. According to William McCance, chairman and president of TAG Group, “Most advisers without a succession plan recognize the potential perils of not having one, but without motivation to retire, advisers may feel they have plenty of time to plan, even when they are beyond the typical retirement age. It’s time for the aging army of financial advisers to follow their own advice when it comes to their businesses . for their clients’ sake, as well as their own [1].” The most compelling reasons advisors are considering a sale today instead of putting the sale off:   Current demand and valuations remain strong despite short-term market movement Buyers remain well-capitalized and interest rates remain at all-time lows Long-term capital gains rates are at all-time lows and expected to increase The age of a seller’s clients will only get worse the longer they wait Reg BI will lead to many new sellers flooding the market in 2020 and 2021, changing the buyer-to-seller ratios Based on current data from Succession Resource Group,   and substantiated by other third-party sources, the market for advisor practices remains a robust seller’s market, even in spite of COVID-19 and recent market fluctuation. The value of an RIA has not been materially reduced due to the recent and sudden (and hopefully short term) decline in the market. Steve Levitt, Managing Director of Park Sutton Advisors, shared a timely quote in a recent article, stating, “The inherent value of RIAs is the same as one month ago” [2]?     Based on SRG’s annually published data, the average value of practices continues to be at an all-time high [3]. For those considering selling, it is also important to understand how value is assessed. The value of an RIA is not based on one month or quarter, or a simple multiple on revenue based on the rolling 12 months. Qualified valuation analysts review historical revenue and expenses, looking at both short and long-term trends with both topline revenue and net income, and use this information to estimate the future earning potential.     While values have not changed in the short term, the financing terms of the deal have changed given the new risks in the market. Given current market conditions, the upfront cash component is now typically 50%-80% of the total deal depending on the size of the book, size of the buyer, and expenses of the combined companies. This is down slightly from the average 80-100% before March 2020. The result is a portion of the purchase price is paid out of cash flow after closing. The upside to deferring payments into later years is the ability to mitigate taxes and potentially keep the payments at a lower tax rate, in addition to earning interest on the money.   According to Cerulli Associates, the average age of a financial advisor is 55 years old, and only 30% have formal succession plans – despite 2/3 of RIAs who would like to transition within five years. Based on SRG’s recent deal data, there has been a consistent trend year-over-year of buyers retaining the seller for an elongated transition period, allowing for a smoother transition and higher retention rates. This trend has been driven by advisors becoming more proactive with their exit plan and has been exacerbated by the current market conditions. There has been a consistent trend towards creating greater continuity for the clients, with buyers now typically retaining the seller for two or more years, the seller’s staff, and assuming the current office location. Both buyer and seller want to eliminate risk in the deal, and when market conditions are tur-bulent, that becomes critical to long-term success.   Advisors are very good about helping clients understand the perils of trying to time the market. The same concepts apply to the eventual sale of an advisory business – timing the market typically does not produce

WealthManagement.com: The Future of Advisor M&A

August 2020 By: David Grau Jr., MBA Since the close of Q1 2020, we have seen consistent unrest, including market turbulence that has put many advisors, their relationship with clients, and their investment strategies, to the test. Fortunately, it is times like now that highlight the work advisors do for their clients, much of which is unnoticed when markets are steadily improv-ing. The relationship between the advisor and their clients is the bedrock of value in an RIA, regardless of the amount of AUM, revenue, or profitability. And, while 2020 won’t be the best year for advisors, the inherent value of RIAs seems to be one of the few things unaffected by COVID-19. But, like throwing a pebble into a pond, we will see the ripple effects of 2020 on the M&A market for years to come.   Short Term Impact Advisor M& A activity was on a record-setting pace in 2019, with 2020 expected to be more of the same. Then COVID-19 happened. Deals that reached the letter of intent stage largely persevered despite COVID-19 and markets suddenly declining. However, the pace of sales slowed as buyers reevaluated offers to account for the newfound uncertainty and potentially declining revenue. Even buyers with a longer-term outlook and stomach for short-term risk were forced to reevaluate as their lender became understandably more conservative. As April ended and nerves had calmed, advisors began picking up where they left off with their deals. Despite a short-term decline in revenue through June, valuations remained consistent with year-end 2019 expectations, climbing 3.3% on average through the first half of 2020 from an average multiple of revenue of 2.72x in 2019, to 2.81x YTD 2020.   However, there has been a lasting effect on deal structures, with most deals now containing a clawback feature, and an average down payment of 60% (down from an average of 83% in 2019). Based on Succession Resource Group’s data, 85% of RIA purchases in 2019 used an industry lender, and with the low interest rate environment, SRG expects this number to reach 90% of all deals by the end of 2021. With more lenders every year, increased deal volume, and each lender having unique loan programs, resources such as LendingWell, will play an increasingly important role ensuring advisors find the right financing solution.   Beyond 2020 The COVID-19 impact on advisor revenues rebounded much quicker than initially anticipated, which is expected to act as a catalyst for those advisors who were considering a sale at any point in the next 1-3 years. Kristen Grau, CPA, CVA, SRG’s Listing Director, anticipates increased deal volume as early as this summer based 1) COVID-19 and recent market conditions creating unrest with advisors; 2) Increased compliance challenges (Reg BI and the DOLs proposed new standards for example; 3) The graying of the industry and aging cliens; and 4) A lack of succession planning.   Looking into 2021 and beyond, SRG expects multiples of revenue or earnings to continue to increase, but at a much slower pace as the market sees a significant increase in smaller practices coming to market. Offsetting this appreciation is the expectation that capital gains tax rates and interest rates will rise, driving up the cost of capital and making the near term the most viable time to exit the business for any advisors looking to maximize value and eliminate uncertainty. Disclaimer This article was first published by David Grau Jr., MBA. The original article can be found here. All rights to the original content are held by wealthmanagement.com.

First Affirmative Financial Network LLC Aligns with Succession Resource Group

PORTLAND, Ore. – Succession Resource Group, Inc. (SRG) is pleased to announce a new strategic partnership with First Affirmative Financial Network LLC, which is a wholly owned subsidiary of FOLIOfn, Inc., specializing in sustainable, responsible, impact investing. Through the new partnership, SRG will expand the available succession resources, expertise, access to tools and information, as well provide reduced fees as a new partner with advisor succession planning.   First Affirmative’s partnership with SRG addresses a key strategic need of organizations industry wide – how to raise awareness and provide tangible solutions to help the aging advisor population plan for their eventual transition out of the business. SRG joins First Affirmative’s ongoing effort to inspire action in this area, providing external resources and 3rd party guidance from some of the most experienced minds in advisor valuation and succession planning.   Effective December 2016, First Affirmative advisors will begin to see additional education content from SRG on advisor valuation, strategies to build a more valuable practice, lending and financing options, death/disability planning, acquisition strategies and succession planning best practices. The educational content will be disseminated over the course of the coming months in the form of articles and whitepapers, live webinars, recorded webcasts, and in-person presentations at First Affirmative events. The first tangible step taken by most advisors, whether looking to grow through acquisition or plan for retirement, is having their business valued. For this reason, First Affirmative members will be able to access SRG’s valuation service with the partner subsidized rate of 15% reduced fees. According to Danielle Burns, VP of Sales/Marketing at First Affirmative, “We are excited to partner with SRG and provide our network of advisors access to the tools and resources that can help them better serve their clients and navigate the changing landscape of succession and valuation planning.”   To support First Affirmative’s ongoing commitment in helping their advisors with succession planning, David Grau Jr., Founder and CEO of SRG, said his firm is excited about the alliance and the opportunity. “First Affirmative and their advisors operate in a unique and growing segment of our industry with responsible investing – something that I am personally passionate about and excited that we will be able to help ensure more First Affirmative practices build businesses that will be here for many generations.” Grau said. “I get advisors are busy running their businesses, our job is to help the advisor engage proactively with managing the equity in their business, then provide turnkey solutions so they can get back to business, but rest easy knowing there is a plan for their most valuable asset.”   About First Affirmative Financial Network, LLCFirst Affirmative Financial Network, LLC (“First Affirmative”) , a wholly owned subsidiary of FOLIOfn, Inc., is a leading provider of investment management and consulting services to financial advisors and their socially conscious clients. By integrating a client’s mission and values into the investment process, First Affirmative delivers personalized portfolio management to those who wish to profit from companies making positive contributions to society.   For more information on First Affirmative Financial Network, LLC, visit http://www.firstaffirmative.com/ Contact: Danielle Burns, VP of Sales/Marketing | Phone: (877) 542-8583 | Email: danielleburns@firstaffirmative.com   About Succession Resource Group Succession Resource Group is an M&A consulting firm serving independent financial service professionals across the country. SRG’s team of experts leverages its industry expertise and best-in-class resources to help registered investment advisors, securities professionals, agents, and accountants manage, grow, and realize the value of their businesses. With decades of experience on the team, Succession Resource Group has helped thousands of clients value, protect, grow, improve, and plan for the sale of their business.   Media Contact:Succession Resource Groupmarketing@successionresourcegroup.comwww.successionresource.com