CI Financial’s pivot from a planned IPO to the sale of a 20% convertible preferred stake of its US wealth management division to a consortium of institutional investors is not only a significant move for CI Financial but also sends ripples through the wealth management industry. In this post, we explore the details of this transaction, the potential consequences for CI Financial, and the broader implications for the wealth management industry.
Old Rules of Thumb, Recent Headlines, and the Endowment Effect
The endowment effect has an impact on your RIA and oftentimes rules of thumb and recent headlines can lead to overvaluation. We share the nuances of valuing your firm, from assessing cash flow, growth, and risk to understanding the relevance of non-systematic risks. Uncover the factors that truly influence your RIA’s value and learn how an independent valuation can help you make informed decisions for your firm’s future.
Asset Management Firms Struggle as Market Downturn and Fund Outflows Persist
2022 was a tough year for the RIA industry and the stock market, as persistent inflation, rising interest rates, and geopolitical tensions shook the economy. Asset management firms felt the pressure, but what factors drove this decline and how did it impact the industry? Discover the challenges faced by both active and passive funds, and explore the outlook for asset managers in the face of an uncertain future.
Harry Truman kept a sign with his personal slogan, “The Buck Stops Here,” on his desk. The reverse side of his sign, which faced the President, says, “I’m from Missouri.” Specifically, Truman grew up in Independence, Missouri, and took pride in his hometown. RIAs would be well advised to value their independence as much.
Early last year, as market conditions began to deteriorate, we (along with many others) predicted a coming slowdown in RIA M&A activity. Despite this environment, we were initially proven wrong: RIA M&A activity seemingly defied gravity as the pace of deal activity continued to keep pace with record 2021 levels. Now, the data suggests that deal activity is beginning to lose momentum. So, is the slowdown here to stay? What does this mean for the future of deal activity? In this week’s post, we discuss a few predictions for the year ahead.
Investment management is a people business, and there are aspects to a people business which do not yield to financial modeling. This week, Matt Crow addresses industry conundrums for which there are no easy answers.
Earlier this month, the Federal Trade Commission (FTC) announced a proposed ban on non-compete agreements in employment contracts. If enacted, the proposed ban would prohibit a common provision of employment agreements that employers use to limit employees’ ability to compete.
Q3 RIA Performance Was Mostly Bad, But in Lots of Different Ways
Most of the 9/30 quarterly results are in, and public RIA performance was all over the map. Mostly, it was a rough quarter in a rough year. Sagging AUM led to revenue cuts which dropped straight to the bottom line. Some firms mitigated their downside by cutting bonus compensation and marking down earnout payments for acquisitions. We did a survey of a cross-section of asset and wealth management firms. Ultimately, it appears some business models are working better than others.
The differential in interest in public investment management businesses and private investment management businesses isn’t sustainable. Will higher interest rates eventually wear down leveraged acquirers, as they have in other growth-and-income sectors? Will PE investors start to question the merits of trading companies from fund to fund instead of testing valuations in the open market? Will the public RIA group follow Pzena’s lead and go private? Or will public investors’ newfound interest in dividend stocks lead them to RIAs? It’s tough to forecast a public RIA resurgence but never say never.
Schwab recently released its 2022 RIA Benchmarking Study. The survey contains responses from over 1,200 RIAs representing $1.8 trillion in AUM to questions about firm operating performance, strategy, and practice management. The survey is a great resource for RIA principals to see how their firm’s performance and direction measure up against the average firm. In our blog post this week, we highlight some of the key results of the survey.
Publicly Traded Alt Managers and RIA Aggregators Have Lost Nearly Half Their Value Since Peaking Last November
The RIA sector continued its losing streak last quarter, underperforming all classes of the S&P, which also saw a decline. Because this industry is primarily invested in stocks and bonds, which have declined significantly over the past six months, the market is contributing to the issue. Asset and wealth managers continued underperformance is probably due to lower industry margins as AUM and revenue decline along with the market while labor costs continue to rise. In this week’s post, learn more about this and its effects.
It’s de ja vu all over again. The volatility from the onset of the pandemic two years ago has been creeping back up as investors grapple with the global implications of the war in Ukraine. At the end of last year, most RIA owners were enjoying peak AUM and run-rate profitability. Since then, these measures have likely taken a substantial hit as the S&P 500 and NASDAQ are down 12% and 19%, respectively. When this happened two years ago, the market made a sharp recovery in the preceding quarters, but looking forward, we don’t know where the bottom lies. Most RIA principals are likely grappling with a sizable decline in management fees and earnings for the next billing cycle.
With taking a look at the VIX Index, we have assessed that the market volatility is likely here to stay – at least for a while. In this post, we explore what this volatility means for you and your RIA.
February’s CPI growth came in at 7.9% year-over-year (the highest level in recent memory), and the ongoing Ukraine conflict portends further supply chain challenges that could drive prices even higher. The front-end of the yield curve has shifted higher as market participants reason that rising inflation will force the Fed to raise rates sooner and by a greater magnitude than had been previously anticipated.
Historically, a flattening yield curve has signaled an end to a growth cycle, and so far in 2022 that certainly seems plausible. Markets are down and valuation multiples have declined significantly, particularly in high-flying tech stocks. Read this week’s post to find out what this means for the RIA industry.
Dynasty IPO Ticks a Lot of Boxes, and Begs a Few Questions
Last week we were surprised by a rare sighting, an S-1 filed by a prominent player in the RIA community. Dynasty Financial Partners seeks to raise $100 million in a public offering. The mercifully terse prospectus is less than 250 pages, and is recommended reading for anyone who swims (or fishes) in this pond.
Deal count is projected to reach new highs in the fourth quarter of 2021 as market activity continues to gain momentum, likely rounding out another record-breaking year for the RIA industry. In keeping with the rest of 2021, deal volume was driven by secular trends and supportive capital markets. As market activity remains robust, competition for deals continues to favor RIA aggregators such as Mercer Advisors, Mariner Wealth Advisors, Wealth Enhancement Group, and Focus Financial Partners (FOCS), to name a few. In this week’s post, we provide more information about the aggregators and offer our thoughts for the future.
Despite the dip in the second quarter of 2021, RIA M&A activity continues to reach record highs putting the sector on track for its ninth consecutive year of record annual deal volume.
As we discussed last quarter, the same three demand drivers were persistent throughout the third quarter. While fee pressure in the asset management space and a lack of succession planning by many wealth managers continues to drive consolidation, looming proposals to increase the capital gains tax rate has accelerated some M&A activity in the short-term as sellers seek to realize gains at current rates.
Increased funding availability in the space has further propelled deal activity as acquisitions by consolidators and direct private equity investments increased significantly as a percentage of total deals during the recent quarter. What does this mean for your RIA firm? Read this post to find out.
The rise of “permanent capital” providers is both in response to and appropriate for the current environment of premium entrance multiples in the RIA space. While making a permanent capital investment doesn’t eliminate the depressive effects of current valuations on returns, it does help to mitigate them.
Absent self-imposed pressure to generate an exit within the foreseeable future, RIA investors can focus on opportunities for sustainable and growing distributions – the real value of investing in investment management.
While the wealth management industry is not new, the amount of change, churn, and growth that has occurred in the industry over the past ten years make it easy to forget how far the RIA industry has come since the heyday of broker-dealers. Contextualizing the challenges facing the wealth management industry leaves one to wonder if many of these trends are no more than growing pains in the sector’s life cycle. And if so, what might such analysis suggest about the prospects for the fiduciary model?
If the Choice Is Buy vs. Build, "Build" Doesn’t Even Come Close
Are RIA transaction multiples getting out of hand? Contrary to the usual laws of supply and demand, each week it seems like we hear about another blockbuster deal rumored to have happened at an astronomical price, and correspondingly, we meet a new capital source we hadn’t known previously who is looking for way to implement an acquisition strategy in the RIA space. Is this FOMO on a grand scale, or just part of a grander moment in market dynamics?
RIA MIA activity slowed somewhat in the second quarter of Q2, but RIA markets are still on track to record the highest annual deal volume on record. As we discussed last quarter, fee pressure in the asset management space and a lack of succession planning by many wealth managers are still driving consolidation. But the increased availability of funding in the space, in tandem with more lenient financing terms, has also caused some of this uptick. But could some of this activity be attributable to the RIA rumor mill and the hype of double-digit multiples in the space?
Over the last year, many publicly traded investment managers have seen their stock prices increase by 70% or more. This increase is not surprising, given the broader market recovery and rising fee base of most firms. With AUM for many firms at or near all time highs, trailing twelve month multiples have expanded significantly, reflecting the market’s expectation for higher profitability in the future. For more insight into what’s driving the increase in stock prices, we’ve decomposed the increase to show the relative impact of the various factors driving returns between March 31, 2020 and March 31, 2021.
Old Rules of Thumb, Recent Headlines, and the Endowment Effect
As a financial analyst, a CFA charter holder, and a generally reasonable person, I know that Zillow isn’t accurate; but as a homeowner, I can’t help myself. When I am walking around my neighborhood, I always have the Zillow App open, and am speculating about how the “Z-estimate” for my house compares to my neighbors’. And, of course, my house always is better. Why? Because I own it. It’s called the endowment effect. I (as a homeowner) am emotionally biased to believe that something (my house) is valued higher than the market would ascribe, simply because I already own it.
And you, the owner of an RIA, may believe your firm is valued higher than the market value too, and old rules of thumb and recent industry headlines amplify the problem.
Deal Activity Rebounds After Brief Lull; Deal Terms and Multiples Remain Robust
After a brief lull during the second quarter of last year, RIA deal activity surged in the fourth quarter, rounding out a record year in terms of reported deal volume. Concerns about the pandemic and market conditions were quickly shrugged off, as deal terms and the pace of deal activity returned to 2019 levels after the brief pause at the peak of the shutdown.