When Markets Plunge, Does the Value Of Your FA Business?

The Correlation Between the Markets and Value of Independent Financial Advisor Businesses Are Increasingly Weaker, as Industry Keeps Evolving

Julius Buchanan, Senior Contributing Editor, Wealth Solutions Report

To put it mildly, economic uncertainty, record-high inflation and severe market volatility have combined to create downdrafts across investor portfolios. 

In prior years, the automatic industry assumption was that declining portfolio values would directly correlate into a drag on the valuations of independent financial advisor businesses.  But is this still the case?

After all, the majority of independent financial advisors have expanded their fee-based advisory business over the past decade, consistent with the broader evolution of the industry towards more planning-based client relationships.

Ergo, when client asset values decline, fee-based advisory revenues shrink in tandem.  So wouldn’t logic dictate this should have a continued and direct impact on the valuations of independent FA businesses?

The answer is:  Maybe not so much.

To further explore this issue, WSR recently connected with Ryan Grau, Partner & Vice President of Business Service Valuations at FP Transitions.

Ryan Grau, FP Transitions

Headquartered in Oregon, the consultancy provides entity structure and M&A services, succession planning, transition planning and business valuation solutions to the independent wealth management space

With over $4 billion in equity purchases in 2021, FP Transitions has developed an impressive body of work that enables a depth of perspective on valuation trends that are worth hearing for the industry at large.

WSR:  There have been double digit percentage drops in the equity markets year to date.  With so many independent financial advisor businesses working on a fee-based advisory model (either wholly or partly), has the decline in revenues resulted in lower valuations for these businesses?

Though certain markets are down, we’ve observed limited correlation between the equities markets and firm valuations.

Market declines versus FA business valuations – The direct correlations aren’t always there

Despite any concern around an investment manager’s value being tied to current client AUM and investment performance, any market pull-back we’ve witnessed through both the Great Recession and the beginning of 2020 only reaffirms the resilience of properly structured and well-equipped financial advisory practices.

WSR:   What’s your advice to independent financial advisor businesses that want to preserve and even grow their value – and valuations – during this period of significant market uncertainty?

Most of our clients and partners are viewing this recent market shift as a blip on the radar.

Even if affected briefly, these enduring firms get right back on the growth curve as soon as markets recover.

Our advice to advisors is to proactively communicate the value their firm and offer transparency in support of the client’s goals, as the primary goal is to solidify client value and retain existing clients.

By following a carefully calculated long-term growth and succession strategy, these firms can easily recalibrate, manage and maintain operating costs, and continue to support a diverse, multi-generational ownership team.

WSR:  Do you have any predictions to share about demand for valuations and transactions in the independent financial advisor space going forward?

We continue to see an increased demand for valuations as well as transactions.  And, we are on track to supersede our prior year’s record of 134 transactions.

If this market continues to decline, we may see practice values “level off” briefly, though valuation multiples are expected to remain at an all-time high due to the amount of capital available to buyer’s and hyper-consolidation in the market.

Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at jbuchanan@wealthsolutionsreport.com

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