Buying an existing registered investment advisor (RIA) firm can be an attractive path for those looking to enter the wealth management business. There are over 12,000 RIA firms in the USA, but only a small subset are up for sale at any given time. When evaluating an independent RIA for acquisition, key factors to consider include the firm’s assets under management, client retention rate, services offered, succession plan, and valuation.
Assessing the RIA’s client base and AUM history
A crucial component is assessing the RIA’s current client base and history of assets under management (AUM). Look for a firm with steady, organic AUM growth over a 5+ year period, as this indicates stable client relationships and the ability to gather new assets. Client demographics like age distribution and income levels also matter when evaluating future revenue streams. Additionally, examine concentration risk – if one client accounts for over 20% of AUM, it exposes the business revenue to significant risk.
Understanding the advisor-client relationships
The fidelity of advisor-client relationships is key. Look for indicators like client retention rate over a 5+ year period and what percentage of revenue comes from new versus existing clients. A robust client review program and successful referrals into the business are also positive signs. Schedule meetings with clients to assess their perspective on the value being delivered.
Evaluating the services offered
Determine what products and services the RIA delivers to clients and the corresponding revenue mix. For example, does revenue come from assets under management, financial planning fees, commissions, or other sources? Consider whether the revenue aligns with services provided or if new offerings may be needed to meet client expectations.
Reviewing operations and succession plan
Assess operational efficiency by reviewing productivity metrics around clients per advisor and AUM per employee. Request details on succession planning to gauge future leadership after an acquisition. Inside buyers, internal succession plans, or external buyer arrangements reveal how prepared the firm is for transition.
Determining a fair valuation price
Valuation typically starts at 2-3x EBITDA (earnings before interest, tax, depreciation and amortization) and adjusts based on other factors. Revenue concentration, client demographics, operational efficiency, succession readiness, and growth trajectory impact fair pricing. Be wary of overpaying without understanding drivers of historical profitability or seeing future scale.
When acquiring an independent registered investment advisor, rigorous evaluation across five key areas – client base, advisor relationships, services, operations, and valuation – helps determine if the opportunity matches expectations around growth, client service, and leadership transitions. Moving forward without addressing gaps in these areas leads to significant business risk.