Advisors think their practices are worth more than the market is currently paying, and retired clients can act as a drag on valuations.
That's according to new research from Cerulli Associates, which found that despite the abundance of would-be practice buyers, sellers expect too much based on actual purchases within the last year.
Nearly two thirds of independent advisors (65 percent) are contemplating the purchase of a practice, but most of those (53 percent) are only thinking about it, compared with the 47 percent who are actually shopping around. And for every advisor who buys a practice, there are nine more who want to. With this kind of market pressure, it might be thought to be a seller's market — but that's not necessarily the case. Sellers are looking for more money than market conditions will support.
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"With many buyers in the market, advisors' expectations regarding the value of their practices are high," said Kenton Shirk, associate director at Cerulli, in research. "On average, advisors believe their practices are worth 2.8 times their total revenue. For those advisors who actually purchased a practice within the past 12 months, the average revenue multiple paid was 2.2 times revenue."
If there are so many advisors hungry to buy a practice, why should that be the case? Older and retired clients can weigh down practice valuations. According to the research, "nearly half of advisors' clients (44.5 percent) are over the age of 60. Practices that are heavily weighted with older clients are less desirable because they have less potential to generate future cash flow. Retired clients are also inclined to deplete asset balances as they withdraw money for living expenses, and they often need higher levels of service compared with clients in the accumulation phase."
And if that's not enough to cast a pall over the optimism of selling a practice, there's this: Almost a third (30.9 percent) of advisors themselves are 55 or older, and as they start to retire, more and more practices will become available—turning what might presently be a seller's market into a buyer's market.
The solution? Cerulli said that sellers should "work continuously to ensure an infusion of clients across various age ranges, and (encourage) them to build multigenerational relationships with their clients' families to minimize a buyer's concern about practice demographics."
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