PHILADELPHIA -- Online advisory services are beginning to have an impact on the valuations of financial advisory firms.

The low prices and competitive threat of so-called robo advisors were cited as factors that traditional advisors must take into account when valuing their firms for mergers and acquisitions, say experts at Gladstone Associates' annual advisor conference in Philadelphia.

"The robo-advisors worry us," said Rush Benton, senior director, strategic wealth, for CapTrust Financial Advisors, during a panel discussion on acquisitions in the RIA market. "If they're charging 25 basis points and clients are paying advisors 1% of assets under management, clients are going to ask what they are paying the extra 75 basis points for. RIAs had better be able to answer that question, and the smaller firms may not be able to."


But Focus Financial Partners co-founder and managing director Rajini Kodialam disagreed. "We don't worry as much about robo advisors," Kodialam told conference attendees. "You are in the people management business. No computer can replace you. It's not about scale -- it's about you and the advice that you give, which is not going to get replaced."

Kodialam also clashed with Matt Brinker, senior vice president of partner development and acquisitions for roll-up rival United Capital, about the role of change in the operation of advisory firms.

Focus' primary business model is based on acquiring larger advisory firms and allowing the partners to continue running the business as they had before partnering with Focus, Kodialam said. "They don't want to change, and we don't want them to change," she said.


By contrast, United Capital is looking for "like-minded advisors who are willing to change," according to Brinker. Because the advisory business is changing so rapidly, he argued, "disruption and a lot of change are required."

Asked to elaborate, Brinker also cited the exacerbation of pricing pressures by robo advisors. Too many financial advisors, he said, are "giving away" advice. United Capital, Brinker asserted, is trying to monetize the value of "the financial guidance experience, so the client understands that's what they're paying for."

Panelists also weighed in on several other valuation topics. Benton sounded skeptical about the benefits of mergers to form midsize local firms. "What's the point?" he asked, questioning if there were really any benefits of size or scale. He also noted that local mergers often came with "higher cultural risks."

Paradoxically, firms that put themselves on the selling block are usually considered the least attractive acquisition candidates, the panelists agreed. "We avoid firms that are technically for sale," Brinker said. "If it's all about maximizing value, if that's the No. 1 priority, then there's usually not a good outcome for anybody."

The panelists concurred that organic growth and recurring revenue were the most desirable qualities that firms could offer potential buyers.

"Organic growth is the value creator," Benton said. "If you buy a firm for $5 million, until the firm is worth more than $5 million, you haven't accomplished anything."

Read more:

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access