During and shortly after the financial crisis recruiting deals skyrocketed to all-time highs No longer were practice acquisitions being had in the 200’s, rather the best teams were cashing in above 300%. First Republic, Wells Fargo, and even Morgan Stanley says ‘hold my beer’. Premium deals routinely push past 350% and should you outperform on the back-end, that number can climb to 500%!
Lets take a look at valuations in context, given the downdraft in markets this week. Hitting the bid at the high isn’t easy, but understanding the current landscape should give those of you on the fence some real context
China has had an unprecedented run of growth in their economy but it is finally contracting along with massive depreciation in their equity prices. Before this correction, there was an insatiable appetite of buyers and the price paid for equity prices had little justification for valuation. The situation with financial advisors is not very different.
Financial advisors practices have also had extraordinary growth and the valuations paid by banks has reached epic proportions. A correction seems imminent. Since the lows of 2008 the US markets are up close to 250% and the corresponding assets and production of advisors’ businesses have multiplied almost in lock step. Financial advisors, just like their parent banks, are reaping the benefits of Glass Stiegel – the cross selling opportunities from core asset management services, to life insurance, to lending. Most everything has worked in an advisors favor; core fee based revenue has boomed which has been augmented by transaction revenue of alternative investments, structured notes and general trading revenue;tremendous net new assets growth with capital market booms intechnology to real estate; they have witnessed one the greatest bull markets ever in fixed income and the equity markets; and there has been an explosion of loan and insurance revenue.
With the growth of advisor practices so have their valuations. Most banks have struggled to keep pace with natural attrition when hiring talented advisors to help manage the mass affluent and high net worth client. There seems to be an insatiable appetite for qualified advisors and the price paid to retain them. Whereas 1x trailing 12 production with some backend kickers were the norm, now some advisors are seeing upwards of 200% just to walk in the door and upwards of 400% with realistic backend kickers. Few firms can attest to owning more than 5-6% of the mass market affluent market yet they seem to place a higher and higher price paid per advisor to just maintain the status quo. Added fuel to fire, the recent bidding war for large divisions of talented brokers from Credit Suisse, Barclays and Deutsche Bank have created a frenzy not seen since 2008.
However, in any market cycle, valuations cannot go up foreverand most importantly, the end buyer must always make a reasonable ROI in order to make economic justification. Based on any logical math, the prices recently paid do not make rationale sense and several notable high level banking sources suggest that the biding was is over. In fact, there is an expected flood of advisors coming onto the market post the 2008 high turn of brokers with their 7 year deals coming off lockup.
Making matters worse, we are seeing Trailing 12/mosproduction falling off. The market has been in correction mode since the summer of 2015 and the recent contraction has been particularly severe. Banks have noted asset and revenue growth to be flat to down in 2015. Production for 2016 will be worse. Typically, private clients sell during corrections so advisor production is relatively high, but we likely will not see private clients return to the markets aggressively and will see further declines in production for a myriad of reasons; fewer IPO’s and M&A transactions; the fixed income markets are waning; structured notes and general trading revenue is slowing; the equity markets from Intl, small cap, tech, oil and gas amongst many sectors are getting clobbered.
The Perfect Storm is upon brokers who should heed the clear warnings. With T-12’s seemingly hitting a peek, prices paid by banks have just reached a crescendo, and an impending flood of advisors selling their books – it’s highly encouraged to begin a search. Those who wait may end up wishing they had a better life raft.