A weekly update on issues important to the Investment Management industry
In our latest webinar, Brooks K. Hamner, CFA, ASA and Zachary C. Milam, CFA explore the critical elements shaping RIA valuations in today’s market. They discuss the key factors influencing RIA valuations, the latest industry trends, methodologies for valuing RIAs, and best practices to maximize firm value. We hope you find it informative and helpful.
In motor racing, winning requires building a car with the best combination of speed and handling. There’s a tradeoff between them, as speed requires bigger motors, more structure, and larger tires and brakes, all of which add weight. In the early days of racing, most sports cars focused on either straight-line speed (Ferrari, Corvette) or maneuverability (Porsche, Lotus). Times have changed. Today, winning takes both. And in the RIA space, strong growth and big margins are hallmarks of a winning business.
Last week, Mercer Capital’s investment management team 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. In this week’s post, we share our five key takeaways from the conference.
The RIA industry is facing a potential succession crisis, with many firms still helmed by their founders and lacking in non-founding shareholders. Although succession planning is vital for the long-term success of these firms, it is often sidelined in favor of immediate growth strategies. This article delves into various solutions for RIA principals, from internal transitions to external acquisitions, highlighting their benefits and potential drawbacks.
Higher interest rates over the past three years haven’t had much impact on RIA transaction multiples. As rates started to fall in 2024, we saw the possibility of further support for transaction activity throughout the investment management community. The political and economic environment of early 2025 seems to be pointing to a new risk not seen since the late 1970s, and it isn’t too early for leadership at investment management firms to consider (model) what might happen if we find ourselves revisiting some of the challenges of the Carter years: stagflation.
A few weeks ago, we had the honor of participating in Alaris Acquisitions’ The Buyer’s Boardroom podcast episode on RIA valuations. In this week’s post, we feature the podcast episode, where Brooks Hamner discusses RIA valuation methods, misconceptions surrounding rule-of thumb measures, key value drivers, and the pros and cons associated with internal versus external sales of your RIA business.
Victory Capital is a relative newcomer to the small list of publicly traded asset managers. Since its IPO, it has quietly outperformed many publicly traded peers by employing an acquisition-driven growth strategy that has delivered impressive shareholder returns. In this post, we take a closer look at the factors driving Victory’s success.
Aside from the initial startup years, when fledgling RIAs struggle to achieve profitability, the most difficult period that most firms endure is the transition from the founding generation of leadership to G2. For those that make the transition, getting from the second generation to the third, and so forth, is comparatively easy. Much of this difficulty relates to a contemporaneous transition of ownership — not just the identities of the owners but also the structure of the ownership. In this week’s post we look at the four primary RIA ownership models and discuss how to find the best one for your RIA.
As you can imagine, a lot of prospective clients want to know what the RIA valuation process entails. They’re often taken aback when we tell them it typically takes six to eight weeks from start to finish, but that’s probably because they don’t realize what it all entails if they’ve never had one done. For this week’s post, we’ll channel our inner Nick Saban and focus on the typical valuation process for RIAs.
Goodwill is an intangible asset representing the value of a business beyond its tangible book value. Investment management businesses generally have plenty of value beyond their tangible book value. Therefore, they have lots of goodwill that can be attributed to factors like the firm’s client relationships, the recurring revenue model, brand recognition, or employee expertise. Goodwill and the distinction between personal and enterprise goodwill can have important economic consequences in RIA transactions and disputes. Learn more in this week’s post.
The wealth management industry experienced remarkable growth in 2024, driven by robust market performance, inflation cooling, and shifts in monetary policy. Contrary to earlier concerns of economic instability, the year delivered substantial growth across the RIA sector, signaling resilience and adaptability in an ever-changing financial landscape. As the wealth management industry looks to 2025 and beyond, the dual drivers of demographic change and technological innovation will play a pivotal role in shaping its future. Firms that effectively embrace these trends—by deepening client relationships and harnessing cutting-edge technology—stand to emerge as leaders in an increasingly dynamic and competitive market.
M&A activity in the RIA industry, which had been trailing 2023 levels for much of 2024, experienced a dramatic surge in October. This spike set a new record for monthly deal volume and brought year-to-date transaction figures through November in line with 2023’s pace. In this week’s post, we look at the convergence of factors driving a surge in M&A activity within the RIA industry and what that means for your RIA.
RIAs continued to outperform the S&P in Q4 2024, with alternative asset managers boasting an impressive 60% price gain year-over-year. In 2024, traditional investment managers saw the strongest AUM growth, while alternative managers proved better at converting this growth to revenue. We explore further in our Q4 2024 Market Update.
It has become a tradition for the RIA team at Mercer Capital to end the blog year with a “unique” annual summary of industry events, riffing off Clement Clark Moore’s classic “A Visit from St. Nicholas.” We hope all of you in the investment management community are enjoying the holiday season and looking forward to the many opportunities of the new year. We look forward to hearing from you in 2025. For now, please enjoy the finest only holiday poem written about money management.
A few months ago, our team attended a business appraisal conference in Portland, Oregon, where we learned about a case involving a “Difficult Partner Discount.” Since we’re often hired when business owners can’t agree on price, we’re well aware of partnership disputes, but are pretty confident we’ve never directly applied a “Difficult Partner Discount” to the value of a business or interest therein. That doesn’t mean that partner disputes and departures can’t significantly impair the value of a company, which we address in this post.
No two RIAs are identical but broadly speaking, firms that seek to serve the same types of clients tend to end up with similar-looking business models. A firm’s structure tends to reflect the types of clients the firm seeks to serve and the value proposition it offers to those clients. The result is that firms tend to cluster around a handful of distinct models, and identifying what those models are and how they differ can be a useful exercise both in analyzing a particular firm and in thinking about practice management issues.
Abu Dhabi has been on a buying spree, announcing this week that their sovereign wealth fund was acquiring CI Financial, taking it private just over a year after a Bain-led consortium invested US$1 billion in the publicly traded investment management firm. We suspect the terms of the Bain deal formed the predicate to this week’s announcement.
There’s been a great deal of interest in RIA acquisitions in recent years from a diverse group of buyers ranging from consolidators, other RIAs, banks, diversified financial services companies, and private equity. These acquirers have been drawn to RIA acquisitions due to the high margins, recurring revenue, low capital needs, and sticky client bases that RIAs often offer. Following these transactions, acquirers are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. In this whitepaper, we describe the PPA process, including attributes unique to the investment management industry.
Now that the dust has finally settled on the 2024 election, we can turn our attention to its expected impact on the investment management industry. One of the most impactful expected changes is new leadership at the SEC and a reversal of the prior administration’s ESG and crypto initiatives. It’s difficult to say how the market is digesting these prospective changes in the RIA industry, but the coming weeks will likely determine if the current SEC chairman is stepping down and who Trump’s appointee might be. In this week’s post we review these potential changes and their expected impact on the industry.
Organic growth is a key metric for the RIA industry, and it’s one that varies widely across firms. As such, it’s a key differentiator between firms, and it’s also an impactful assumption in determining a firm’s value. In this week’s post we explore organic growth trends in the industry and the impact of organic growth on valuation.
A racecar is an example of something that, as a whole, is greater than the sum of its parts. An RIA is another example. But, breaking down an RIA into constituent functions yields certain understandings that cannot be seen clearly by focusing on the whole. In this post, we think about what can be learned from component analysis of RIA returns.
A recent CityWire article noted that private equity firms are extending their holding periods for RIA aggregator firms to take advantage of the industry’s higher margins and long-term growth prospects. This stalling tactic shouldn’t spook their LPs since the RIA sector is renowned for its recurring revenue, above-average margins, and demonstrated ability to grow cash flows over an extended period of time. Not many industries have businesses that can sustain The Rule of 40, which posits that venture investors prefer to invest in businesses in which the profit margin plus the growth rate adds up to at least 40%. The investment management industry is a notable exception since it typically boasts EBITDA margins in the 20% to 30% range and annualized growth in revenue on the order of 10% to 15%. So what’s so scary about paying +15x EBITDA for these businesses? We explore in this week’s post.
Alternative asset managers fared particularly well during favorable market conditions for the RIA sector. Over the past year, both alternative asset managers and large RIAs (with assets under management, or AUM, exceeding $250 billion) outperformed the S&P 500, achieving gains of 64.6% and 37.7%, respectively. As these dynamics continue into Q4 2024, the outlook for continued multiple expansion and robust deal activity for alternative asset managers remains favorable.
Following a year where deal volume in the RIA industry nearly matched the all-time high of 2022, RIA M&A activity has cooled in 2024. Fidelity’s September 2024 Wealth Management M&A Transaction Report listed 155 deals through September 2024, down 11% from the 174 deals executed during the same period in 2023. As RIA deal activity experienced a greater decline than the broader M&A market, we explore what this means for your RIA.
