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New Tiburon Research Report - A Comprehensive Overview of Succession Planning, Firm Valuations, & the Growing Acquisition Market for Financial Advisors

Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its newly updated research report on Financial Advisor Mergers & Acquisitions. This research release summarizes some of the report's key findings.

Please click the image above to view the table of contents for Tiburon's Financial Advisor Mergers & Acquisitions
Research Report

The purpose of this report is to address succession planning, firm valuations, & the growing acquisition market for financial advisory businesses. While this topic has become quite popular throughout the industry, little reliable and consistent market data exists because many transactions take place between related parties and because most acquirers do not disclose the terms of individual transactions. As a result, Tiburon’s primary objective was to summarize a common set of facts for all market participants. If your firm is for sale or if you are seeking to acquire an advisory firm, this report is a great reference. This is the fourth draft of this report, with each version getting more comprehensive.

The first draft of this report was written in 1999. That draft compiled existing Tiburon research on this topic.

The second draft of this report was written in 2001. That draft added significantly to Tiburon’s conclusions.

The third draft of this report was written in 2005. That draft addressed all aspects of this growing trend. It started by offering a synopsis of the succession planning issue for financial advisors and introducing the four phases of buyers. The report then introduced the seven key steps to success and discusses firm valuations, utilizing a host of examples from throughout the industry. Finally, that draft report defined seven winning strategies.

Tiburon’s fourth draft of this report was written in 2008; that version sought to coordinate this report with Tiburon’s equally good Financial Advisor Benchmarking & Best Practices research report and to incorporate new industry learnings.

This is the fifth draft of this report. This version sought to bring this report’s table of contents in align with other Tiburon research reports and to coordinate its content with Tiburon’s equally good Financial Advisor Benchmarking & Best Practices research report.

Key Findings
This report has a long list of interesting facts to share:

The Emergence of the Succession Planning Issue
This section outlines the emergence of the succession planning issue:

Market History, Market Definition, Market Growth, Current Status, & Key Issues

  • There were many unsuccessful financial advisor roll-up strategies in 2000 and 2001, including Investment Advisor Group (IAG), Investment Managers Incorporated (IMI), Legacy Investment Partners, & the Founders Group
  • Successful financial buyers with various acquisition strategies include Clark Consulting, Focus Financial Partners, Highland Capital, and National Financial partners
  • Financial buyers’ keys to success include capitalization, depth of management team, a clear exit strategy, and a well-structured deal
  • Fee-based financial advisor mergers & acquisitions are up over 600% since 1999, with 81 deals taking place in 2007
  • One-half of all independent reps intend to sell their businesses upon retirement, with selling to an existing partner or employee being the most popular planned exit strategy
  • Over 90% of insurance producers want to build their practice in a way to get equity out of it
  • Just 8% of tax professionals have a succession plan, with the prevalence generally increasing with firm size
  • One survey claimed that 60% of solo financial advisors have either thought about or are attempting to merge with other firms
  • The two main types of strategic buyers for financial advisory firms are banks and CPA firms; revenue synergies are almost always the driver for acquisitions
  • Surprisingly, one study suggests that there is not an increasing multiple paid for larger financial advisory firms
  • The median value for financial advisors that claim to have had a formal valuation was 6.9x cash flows
  • Median valuations vary by region, with firms in the Northeast selling for the highest prices
  • The average fee-only financial advisor interviewed believes his/her firm to be worth $9.7 million, with substantial variance and a median of $2.8 million
  • Using a revenue multiple methodology, two-thirds of independent rep firms are sold for 1-2x revenues
  • The CPA firm acquisition market has converged around 1x revenues
  • The first key is that fee-based advisory firms have more value than transaction-based advisory firms
  • The average fee-based financial advisor in the survey receives over 90% of his or her revenues from investment advisory fees
  • Surprisingly, the largest fee-based advisors are the least likely to have a written business plan
  • 26% of tax professionals have a business plan, with prevalence increasing a little with firm size
  • The average fee-based financial advisor has seen a 7% annual growth in his/her number of clients, with larger advisors adding clients more quickly
  • The average fee-based financial advisor has been growing assets under management 29% per annum, with the smallest advisors exceeding the average
  • The average fee-based financial advisor has been growing revenues 19% per annum, with growth rates steady across firm sizes
  • The average independent rep firm has grown its client base by 5% per year; growth has stagnated for the larger firms
  • The average independent rep firm has grown its client assets under administration by 10% per year; growth has stagnated for the largest firms
  • The average independent rep firm has grown its revenues 16% per year; larger firms have grown their revenues faster
  • The average tax professional has seen a 10% growth in its number of financial planning clients over the past three years, with the smallest and largest firms fairing better
  • The average tax professional has seen 9% growth in its assets under administration over the past three years, with the smallest and largest tax professionals growing assets the fastest
  • The average tax professional has seen 12% growth in revenues per annum; growth rates across revenue segments have been relatively consistent
  • The average independent rep firm generates $1,679 revenues per client; larger independent reps earn more per client
  • Most tax professionals have been introduced to a buyer or a seller through an industry activity
  • Evaluating the client base is the key aspect of due diligence, especially when the business itself is not being purchased
  • The average fee-based financial advisor is hoping to receive almost all sale proceeds in cash
  • Business Transitions says one in thirty deals they broker will fail, resulting in a 4% failure rate
  • About 70% of mergers fail to achieve expected revenue synergies
  • The key learning from break-ups is that every partnership needs a detailed written agreement to ensure that any break-up is as painless as possible

Leading Acquirers

  • Leading financial advisor acquirers include Wealth Trust, Clark Consulting, Highland Capital, and National Financial Partners
  • Other financial buyers have recently made some notable acquisitions as well, including Genworth, Carret & Company, and Outlook Financial Advisors

Future Predictions for Financial Advisor Mergers & Acquisitions

This section outlines the future predictions for financial advisor mergers & acquisitions:

  • Larger independent reps are more likely to have succession plans
  • Less than ten percent of independent reps have had a third-party valuation performed on their businesses
  • Larger independent rep firms are more likely to have had a formal valuation
  • Some of the potential acquisition activity is not related to an exit strategy at all, but rather the ability to build something bigger with more resources
  • Across all independent reps, there are four key business goals, all involving growing the business (revenues, assets, and income) and retaining clients
  • Five types of buyers have emerged for financial advisor businesses, including financial, strategic, competitors, partners, & employees
  • Some financial advisors think that there are more buyers due to new entrants interested in acquiring their way in and firms that are seeking to grow through acquisitions, possibly leading to higher prices
  • Another survey said that a larger percentage of fee-based financial advisors are looking inward Fee-based financial advisors rated the importance of the succession planning issue as a 7.3, with mixed scores
  • Amongst fee-based financial advisors, the likelihood of having a written succession plan increases a bit with size
  • Fee-based financial advisors have been approached an average of 4.0 times regarding selling their businesses, with some having had up to ten conversations
  • Almost one-half of listing sellers on Business Transitions now have less than ten years experience
  • Meanwhile, some mid-size firms are seeking to acquire to replace revenues and utilize excess capacity
  • The concentration of fee-based financial advisor assets is starting to happen; 72% of advisors’ assets are concentrated with advisors having over $200 million
  • Most fee-based financial advisors could not name an acquirer that they consider impressive
  • A telephone survey revealed that most tax professionals are planning to sell to another local advisor, though quite a few are grooming someone internally to take over the business as well
  • A written survey revealed a much bigger share of tax professionals who have not determined their succession plans
  • External buyers for the businesses of tax professionals involved in financial planning are probably limited to other tax professionals with similar business models and smaller CPA firms
  • Most tax professionals think that other tax professionals and employees & partners will be the most successful buyers
  • Tax professionals believe that other tax professionals and employees & partners will be most successful at retaining clients
  • Amongst a group of tax professionals interviewed by telephone, less than one-third have a written succession plan
  • Almost none of the tax professionals interviewed by telephone have had a third-party valuation performed on their practices
  • Tax professionals report that finding financing and preparing the business for sale are the two largest obstacles to more transactions taking place
  • More than one-half of insurance agents plan on transferring their business to a family member as an exit strategy
    The financial services regulatory environment is likely to become more defined

The Crisis or Opportunity for Independent Broker/Dealers & Custodians

  • Over one-half of all independent financial advisors are over age 50, suggesting a pending retirement movement
  • Independent financial advisors over the age of 50 control more than one-half of the revenues at independent broker/dealers and custodians

The Value-Added Opportunity for Mutual Fund & Other Companies

  • The succession planning issue provides a value-added opportunity for mutual fund and other companies
  • Mutual fund and other companies may be better positioned to sponsor conference presentations & conference workshops

The Opportunity to Design a Legitimate Financial Advisor Acquisition Strategy

  • Many financial advisor acquisition strategies have lacked merit
  • Fee-based financial advisors say that the most compelling parts of a national network model are the succession planning, back-office & compliance, and marketing components
  • Fee-based financial advisors most frequently listed quarterly reports, centralized compliance, and accurate downloads as the most important back-office features
  • Fee-based financial advisors attribute their moderately high rating on their need for customized financial planning software to the unique value-add it can provide clients
  • Fee-based financial advisors attribute their high rating on the building of a centralized compliance function to the time and resources spent on dealing with compliance
  • Fee-based financial advisors rated the importance of potential back-office savings as a 5.8
  • Fee-based financial advisors attribute their relatively high rating on receiving marketing assistance to fee-based financial advisors’ current lack of marketing skills
  • Fee-based financial advisors attribute their mixed ratings on the focus on firms with transferable marketing strategies to their level of personal need in this area
  • Fee-based financial advisors attribute their high rating on the importance of avoiding a product push as this being essential to any deal with fee-based financial advisors
  • Fee-based financial advisors most frequently listed alternative investments and separate accounts as the most desired custom designed products
  • Fee-based financial advisors attribute their relatively positive rating on the focus on firms with complementary service specialties to the trend towards wealth management
  • Almost ninety percent of fee-based financial advisors claim to have transferable business skills
  • Fee-based financial advisors most often point to technology as their transferable business skill
  • Most fee-based financial advisors mentioned investment process as the critical item on which they would need to retain autonomy
  • Fee-based financial advisors pointed to their willingness to relinquish control over operational issues like people management and client billing
  • Fee-based financial advisors most frequently listed improvements for clients as well as retaining autonomy as the key attributes that would make them sell
  • Most fee-based financial advisors mentioned a substantial amount of money as the key deal attribute that would make them be one of first half dozen firms acquired
  • Fee-based financial advisors most frequently listed strength of advisor client relationships as another key attribute acquirers should seek in advisors

The Opportunity to Create a Producers Group for Mid-Tier Financial Advisors

  • There is also an opportunity to consolidate a group of mid-tier advisors or create a producers group to bond them together
  • Fee-based financial advisors rated the idea of instead building or backing a producers group for fee-based financial advisors as a 5.9
  • Fee-based financial advisors attribute their moderate rating on the idea of building or backing a producers group for fee-based financial advisors to the possible synergies that could be created between members but the difficulty of execution

The Fill-In Opportunity for Mid-Tier Financial Advisors

  • There is an opportunity for some mid-tier financial advisors to acquire smaller advisors to fill-in gaps and more quickly build their businesses

Strategies for Those Who Fail to Plan

  • Unfortunately, some advisors become disabled or die without having done any preparation
  • Independent broker/dealers have leeway in working with independent reps to ensure that their heirs realize some value, even if no succession plan is in place

The Need for a Financing Source

  • There is an opportunity for a lending source to emerge in the financial advisor acquisition market; specifically, a lending broker may be successful in this industry
  • Seller financing has been the rule in the industry; often the up-front cash component is only 25%
  • American Express Centurion Bank provides loans for its financial advisors
  • Citigroup, Wachovia, and Matrix Bancorp may be possible financing sources
  • Cole Taylor bank made news when it became the first bank to offer a financing program specifically targeted for financial advisor acquisitions
  • Midwest Bankers is another recent entrant as a lender to financial advisory firms
  • Local banks can also be a source of financing
  • Advisors may also find that a Small Business Administration loan is an alternative for financing

Opportunities Outside the US

  • Worldwide financial advisor acquisition opportunities exist throughout the world
  • There have been a couple of successful acquisitions in Australia & New Zealand

To better understand the developments in Financial Advisor Mergers & Acquisitions, executives can purchase Tiburon's A Comprehensive Overview of Succession Planning, Firm Valuations, & the Growing Acquisition Market for Financial Advisors research report where the key findings highlighted above are covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.

More Information

The following links will open specific pages on Tiburon's web site:

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Tiburon Strategic Advisors

Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer market research & strategy consulting services to all types of financial institutions and investment managers:

  • The firm has served over 300 corporate clients and completed over 1,100 projects since its founding, and today, its knowledge base includes mutual fund distribution, separately managed account programs, alternative investments, wealth management, insurance products, banking services, the fee-only financial advisor market, the CPA firm market, the family office market, and various international markets.
  • Tiburon holds a series of CEO Summits semi-annually for its executive-level clients. The next CEO Summit is scheduled for October 14-15, 2008 (San Francisco, CA) at the Ritz Carlton Hotel in San Francisco, CA. 2009 dates are April 9-10, 2009 (New York, NY), and October 7-8, 2009 (San Francisco, CA). Attendance is by invitation only and attendance at each Summit is limited to 125 senior industry executives. Visit the CEO Summits section of Tiburon's web site for details on current and past CEO Summits, including attendee lists, meeting agendas, and highlights. Please contact Tiburon's Managing Principal Chip Roame at CRoame@TiburonAdvisors.Com or (415) 789-2541 if you are a Tiburon client and have an interest in attending a future Tiburon CEO Summit.
  • Tiburon has published forty-two ~300-400+ page research reports, which offer detailed analyses of growing business segments; each is available for $5,000; these reports can be ordered by contacting Sarah Sage at SSage@TiburonAdvisors.Com or (415) 789-2540.
  • Tiburon offers an annual research report retainer service, whereby dozens of clients receive all Tiburon reports published within a year for $25,000; clients can subscribe to Tiburon's 2008 Research Report Retainer by contacting Sarah Sage at SSage@TiburonAdvisors.Com or (415) 789-2540.
  • Tiburon also offers a database access program, whereby it shares its 300,000+ person industry executives contacts database with dozens of clients for $25,000 per year (distributed quarterly); clients can subscribe to Tiburon's Database Access Program by contacting Sarah Sage at SSage@TiburonAdvisors.Com or (415) 789-2540.
  • Tiburon offers thirteen online business benchmarking tools that are available to all types of financial advisors in an effort to help them benchmark their business practices and build more successful businesses. The sites include www.BrokerBestPractice.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-only financial advisors, www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Almost 5,000 advisors have used these tools. By completing one of the online surveys, financial advisors can access a FREE copy of the relevant comprehensive Tiburon research report, which summarizes and analyzes the collective results.
  • Tiburon's weekly research releases, like this one, are emailed for free to interested industry executives, media representatives, conference planners, and individual financial advisors. Over 55,000 industry executives now receive these releases. Feel free to sign up to receive future research releases at Tiburon's web site (www.TiburonAdvisors.Com) if this release was passed to you by a colleague and you would like to receive them directly in the future.
  • Tiburon plans to expand its workforce in 2008-2009. Specifically, the firm plans to add two-to-three incremental principals (the most senior role at the firm) and several more research managers in 2008-2009.
  • Tiburon has built three executive programs (CEOs-in-Residence, Financial Advisor Roundtable, and Consulting Fellows) in an effort to bring the experiences of additional senior level industry executives to Tiburon clients. Feel free to contact any of the members of Tiburon's executive programs directly or ask that they be included in any ongoing TiburonTiburon has built three executive programs (CEOs-in-Residence, Financial Advisor Roundtable, and Consulting Fellows) in an effort to bring the experiences of additional senior level industry executives to Tiburon clients. Feel free to contact any of the members of Tiburon’s executive programs project.

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