On Thursday, March 15th, the U.S. Court of Appeals for the 5th Circuit struck down the DOL Fiduciary Rule. It is not known at this time whether this ruling will be appealed, or if it will apply to the entire country or just the states residing inside the 5th Circuit Court’s jurisdiction (Louisiana, Mississippi, and Texas). Nevertheless, the decision will have an impact on the value of advisor practices in 2018 and beyond, due to the expected shift in the supply-demand curves for advisor practices that are for sale.
For years, industry experts have made predictions (based on industry demographics — age specifically) that the industry should expect a significant increase in the number of advisors retiring, with some studies anticipating 100,000 advisors retiring over the next decade. Based on the data, it is reasonable to expect that there will be an increase in the number of advisors selling their practices, which will result in lower overall values, as finding a practice for sale becomes easier and/or more common. There has already been a modest increase in the volume of practices selling each year, but demand has continued to outpace supply. The predicted “wave” of retiring advisors, however, has been slowed in large part due to the state of the U.S. economy and stock market, which has made it a great time to be an advisor.
This reduction in RIA sales/mergers is directly in contrast to data reported by firms like Echelon Partners and DeVoe & Associates, who cite bullish markets for advisor mergers and acquisitions fueled by strong market conditions. The discrepancy results from the data they reference, which is primarily based on recruiting activity and not actual mergers or acquisitions.
According to Erik Pahlow of Succession Resource Group, "With equity markets relatively stable and continuing to set new records, it is a good time to be in business — clients are happy and advisors near retirement are not feeling compelled to work long hours and engage in tough conversations. As a result, advisors who might otherwise consider retirement are reluctant to forgo another year of income and would rather push the sale of their business off for another year or two."
The DOL Fiduciary Rule was one external factor that had already begun motivating more advisors to retire now and not deal with the new rules. Moreover, its impact on the value of advisory practices was expected in 2018/2019, which would have resulted in more sellers on the market all at once, driving values down across the industry.
"With the 5th Circuit Court’s recent decision, the expected material increase in advisors retiring has been delayed again, bolstering values -- for now. At this point in time, the stock market is relatively stable and trending up. The values for practices are at the highest ever recorded by Succession Resource Group, capital to acquire practices remains available and with low-interest rates, down payments are at all-time highs, and with the DOL Fiduciary Rule struck down, it is unlikely we will see the expected flood of sellers this year or next, leaving our current buyer-to-seller ratio at 45:1," Kristen Grau, CPA/CVA, said. There has not been a better time in the last decade to sell a practice. Depending on what happens with the DOL Rule, the stock market, and the aging advisor population, we may be seeing peak values in our industry.