RIA, M&A and AI: Acronyms with Something in Common

You can’t spell “RIA” without “A” and “I.” Coincidence?

Not only is artificial intelligence redefining client-advisor relationships — it’s also influencing firms’ potential valuations. But how much is an ongoing question. Some, like Allen Darby, CEO of Alaris Acquisitions, say that buy-side firms may look at an RIA serving fewer clients due to a lack of AI — relying on human labor alone, in other words — as overstaffed and price the cost of “rightsizing” into low-ball offers. Others disagree, since AI is becoming increasingly common and democratized: A Schwab study earlier this year found that at least 63% of firms now use AI tools in some capacity, up more than double from 2023.

“Valuations come down to the human beings, advisors. That’s what AI can’t do,” said Craig Toberman, a CFP with Toberman Becker Wealth. “All the soft skills and connections with the clients that they have — those are what really drive valuations for firms.”

AI + OG = Value?

Still, not all AI use is created equal. There is a drastic disparity by firm size: RIAs managing over $5 billion were over three times as likely as those with less than $1 billion in assets to mention AI or machine learning in their brochures. Others in the industry agree that AI holds much more sway over a firm’s value than it used to. AI use, alongside organic growth, is increasingly becoming more relevant than AUM as the metrics to watch, Jim Dickson, Elevation Point’s CEO, told The Advisor Upside Show last month. “Do you have a modern technology that’s really data-based? … If you don’t have your data right, AI is almost impossible to execute,” he said. “When we’re looking at firms, we’re looking at, ‘What’s their data like? Is it codified, can you extract it?’ If you can do that, there are a lot of efficiencies in the business as it relates to some cost-saves around people and around workflows.”

And there are other ways AI can drive a firm’s valuation, Dickson said:

• Integration: If a sell-side firm’s tech stack isn’t going to merge well with another firm’s, or if there’s too much work involved, the buyer is likely to look elsewhere.
• Serving multiple niches: Beyond saving time, AI can handle more clients — and therefore more niches — potentially leading to more organic growth.

Write That Down, Write That Down! So are buyers already pricing AI into their offers? Not just yet, Darby said. But he expects to begin seeing it over the next couple of years in the form of extra due diligence or tougher terms for firms whose operations depend on manual work. For those looking to sell in the future, advisors should chronicle their AI use for potential buyers, he added. “Document how work gets done and who does it, so a buyer can see the firm runs without the founder in every decision,” Darby said. “If AI frees up time, put that time into growth and make it visible.”