continued from page 38 tegic Partners , has been working over the past five years with private equity investors , family offices and other investors in the RIA space and has seen 100 different transactions he says . He says he ’ s seen the giant firms ’ valuations increase from 12 to 14 times EBITDA to 16 to 20 times EBITDA on much larger cash flow numbers . At the same time , the total cost of serving clients has generally declined .

“ The cost at the customer level has declined or improved , but the actual profitability of the RIAs has generally gotten better ,” Roth says . There are a couple of reasons for that , he says . “ RIAs that use third-party managers for most of the portfolio construction have shifted their core holdings to ETFs and index funds and other low-cost options for the client . … If you ’ re charging 85 to 100 basis points five years ago , you ’ re probably still charging somewhere in that range , maybe two or three basis points less .” If you ’ re doing something simpler like managing large-cap stocks , you probably feel more fee compression in your core offerings , since you can ’ t charge more for hugging an index , he says .

Firms with $ 5 billion to $ 10 billion serving the mass affluent and high-net-worth segments , those focused on helping clients with their financial planning and goals and tax-managed portfolios , are running EBITDA to revenue margins in the 35 % to 40 % range . “ Those firms are the firms that are most interesting to private equity ,” Roth says . “ Because private equity firms are using leverage themselves to buy these businesses , it ’ s really important that the firms are growing .” It wouldn ’ t be attractive to PE if the firm was growing with market , he says — lifestyle practices growing at only 3 % to 5 % a year .

Roth says the reason there are five times as many firms investing in the retail wealth space as there were five years ago is that 1 ) it ’ s cheap to borrow money right now , and 2 ) it ’ s hard to find other industries protecting 35 % to 40 % margins like retail wealth is .

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