Last week, Matt Crow and I attended Dimensional Fund Advisors’ Deals and Succession conference at Dimensional’s offices in Charlotte, North Carolina.  The event focused on the current M&A environment and best practices for internal succession planning and ownership expansion.  The two-day conference was well-attended and organized and included several presentations and workshops from Dimensional’s Practice Management team, industry experts, and RIA principals.

Here are our key takeaways from the event and related Dimensional studies:

1. Applying an EBITDA multiple to an RIA’s cash flow is the primary methodology for valuing investment advisory firms.

According to a poll conducted at the conference, most attendees believe applying a market-based multiple to an RIA’s earnings measure is the primary method for valuing these businesses.  We were relieved that AUM and revenue multiples were not the top choices but disappointed that the DCF method was not number one.  DCF models are more adept at incorporating an RIA’s expected cash flow as well as its unique risk and growth considerations in the valuation.  EBITDA multiple valuations are more popular due to their simplicity, but thankfully, many of the conference presenters and panelists noted that blindly relying on reported deal multiples can lead to inaccurate estimates of value for many RIAs.

2. Debt financing for RIAs is more accessible than ever.

Dimensional’s Livia Ramirez moderated a session on RIA financing with Aaron Hasler of Skyview Partners, James Hughes of Live Oak Bank, and Peter Nesvold of Nesvold Capital Partners.  They each discussed the growing demand for debt financing and how their firms work with RIA clients to help finance a transaction or partner buy-out.  Most banks are uncomfortable lending to investment advisory firms due to their lack of fixed assets that can be used as collateral, but financing options are available for these types of deals.  You should give them a call if you’re looking for a (non-intrusive) capital partner or debt financing options.

3. Referrals from existing clients remain the top channel of new client growth for investment advisory firms.

According to the 2024 Dimensional Global Advisory Study, the number one source of new client growth for these businesses was referrals from existing clients, followed by advisor business development, referrals from centers of influence, and digital marketing efforts (in that order).  The study also noted that the top growth challenges for advisory firms were capacity constraints, sourcing prospective clients, and developing a marketing strategy.

4. One year is not enough time to complete a succession transition.

The overwhelming majority of attendees responded to another survey conducted at the conference that said twelve months or less was not a reasonable timeframe for executing an internal succession plan.  The most common response was 1-5 years to complete the transition, but we’ve seen larger RIAs take ten years or more to transition their ownership, management, and clients to the next generation.  To us, it’s a never-ending process since you should constantly groom your eventual successor if you want to sustain the firm beyond your involvement.

5. RIA deal activity remains robust despite higher interest rates, market volatility, and geopolitical concerns.

Several presenters noted this at the conference and attributed it to the industry’s attractive business model, the growing number of HNW individuals, and continued interest from private equity firms.  This should factor into your sell externally/transition internally decision, but many panels (including ours) advised that these should not be viewed as mutually exclusive options.  Transitioning some of your ownership and responsibilities internally will actually make your firm more attractive to an outside buyer, as many RIA acquirers like to see founding and next-gen principals continue to carry a stake in the firm’s equity after the deal closes.

Final Thoughts

In conclusion, we wanted to thank Dimensional for hosting a great conference and highly recommend you attend next year if you get the opportunity.

Mercer Capital is a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of asset managers, RIAs, trust companies, broker-dealers, PE firms, and alternative managers.