Partner at professional services firm explains that estimates and numbers mean less for advisors than what one party is willing to pay
Advisors looking to understand what their book of business is worth will start looking for numbers. They’ll talk with higher ups at their firm, or they’ll bring in consultants, or they’ll look out for articles telling them exactly how they should calculate the value of their book. Brett Evans thinks that when advisors start clinging to quoted numbers and earnings multiples like they’re gospel, they need to remember the core rule of any deal: what you’re selling is only worth what someone’s willing to pay.
Brett Evans is a partner at Capital Markets Advisors LLC. a boutique professional services firm with operations in the US, Canada, and around the world. From his perspective working in both the US and Canadian space, advisors need to be keenly aware of the details of their own practice when they get to market.
“I find it interesting that always everyone's got these theories about what this is worth. Guys and girls, it's worth what someone will pay for it,” Evans says, “For example, one advisor will say they have a $100 million book that they built, that’s totally discretionary, that the advisor knows all about each client. Then you speak to somebody with another $100 million book, but they inherited part of it, only some of it is discretionary, and only 50 per cent of the clients will go with the advisors. So the rules about valuation that people use, how can they apply across both books?”
Evans believes it’s crucial for advisors to be aware of how these valuations are actually hammered out because, given the average age of Canadian advisors, he anticipates we will be awash in books quite soon. As the supply of books skyrockets, he thinks that advisors need to be aware of how these deals are done and how they can maximize the returns they eventually get for their books.
Unfortunately, Evans thinks there is not an adequate pipeline of talent coming through to pick up from the looming wave of retirements. Banks and institutions, he says, are hiring rapidly at the teller level now, but haven’t brought enough people up the chain to the point where they’re ready to become advisors and buy books of business themselves. The result will likely be tougher negotiations around valuations as supply outpaces demand.
To help smooth those negotiations and calculate for the particulars of each individual practice and each potential buyer, Evans and his team have started developing an AI tool with NexusFrontier. The tool should be able to take all documentation required by an FA team for analysis, in any format that it exists, and translate that into dashboard views showing wealth management firms the analytics they require for their unique acceptance criteria and valuation. The AI model is also meant to decipher investor and investment information providing predictive investor and asset retention analytics. The goal, Evans says, is smoother and easier valuations opportunities.
The tech tool, Evans says, can help firms and advisors avoid some of the mistakes made in recent years. During the COVID-19 pandemic Evans claims that books were selling for a premium as large institutions moved to gobble up market share. Many of those deals now look overpriced and many of those institutions are not netting the ROI they needed to justify what they paid.
Advisors should know that the deal negotiation process can go from challenging to ugly quite quickly. Evans and his firm work on almost every side of these deals, with advisors, firms, institutions, and even in the realm of talent searches and support team buildouts. He says that often an advisor who had an arrangement with their institution for the sale of their book will be shocked to learn how little the institution they’ve worked with their whole careers will give them back.
“If I’m speaking to an advisors I always encourage them to be pretty diligent and dig into those arrangements they think they have with their organization,” Evans says. “Because nine times out of ten, when they actually start to go through the motions it all ends up as bulls*it and smoke & mirrors. [Firms] are using these valuations as employee retention tools, and say they’re prepared to pay top dollar. But can they do it in a timely fashion?”
