RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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Current Events


What Market Volatility Means for Your RIA

Is Volatility the New Normal?

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.  

Industry Trends

Hot Inflation and Cold Markets: RIAs Hit With a New Storm Front

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.

Industry Trends

A B2B Fintech in the RIA Space Races to Market

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.

Asset Management Wealth Management

RIA M&A Q4 Transaction Update

Aggregators Continue to Drive Deal Volume in 2021

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.

Wealth Management

RIA M&A Q3 Transaction Update

RIA M&A Activity Continues to Reach Record Highs

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.

Asset Management Industry Trends

“Permanent” Capital Providers Offer a Different Type of RIA Investor

Beginning With No End in Mind

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.

Wealth Management

Growing Pains

Is the RIA Industry in Growth Mode or Shake-Out?

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?

Transactions

The Fundamental Value of RIAs? Scarcity.

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?

Wealth Management

RIA M&A Q2 Market Update

Whispered Numbers Shout

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?

Industry Trends

Multiple Expansion Drives 70%+ Returns for RIA Stocks Over Last Year

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.

Transactions

Q1 2021 M&A Update

An RIA M&A Frenzy

Despite the hiatus in M&A beginning in March of last year with the onset of COVID-19, 2020 was a strong year for RIA mergers and acquisitions and 2021 is expected to be even stronger.

Industry Trends Practice Management

Common Valuation Misconceptions About Your RIA

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.

Transactions

Q4 2020 RIA Transaction Update

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. 

Transactions

Did Macquarie Pay 11x EBITDA for Waddell & Reed? Yes and No

Catching a Falling (Butter) Knife

Last week, Macquarie Group announced its acquisition of Waddell & Reed (WDR) for $1.7 billion. At first glance, the pricetag implies an EBITDA multiple of over 11x and some are asking why Macquarie’s new CEO paid such a premium for a business whose AUM has halved over the last six years. Unfortunately, it’s not that simple. In this post, we dig into the deal economics and explain why paying a premium does not necessarily mean Macquarie over paid.

2020: Too Good To Be True?

Despite Harrowing Moments, the RIA Community Is Prospering

Now, after seven months of living with the pandemic, there is still no end in sight.  We might only be halfway!  But despite the barrage of challenges, the RIA community has embraced WFH, profited from buoyant markets, and resumed a relentless pace of M&A.  It has been, if very strangely, a very good year. Is this a sign of industry resilience?  Or an awful lot of luck? 

The Investment Management Sector Is Being Bombarded … With Money

What Do You Do When Liquidity Matters More Than Fundamentals?

After the initial punditry on whether or not the 2020 market crash/recession and recovery would be “L” shaped, “U” shaped, “V” shaped, or “W” shaped, it has become clear that the recovery is “K” shaped, with higher-skilled and higher paying jobs recovering rapidly, and many lower-skill, lower-paying jobs declining.  What does this mean for RIAs?  Most RIA clients are higher-income professionals who are paying more attention to their investment portfolios in this environment – not less.   Bullish for clients = bullish for the industry.

SEC Expands Accredited Investor Definition: What Does It Mean for RIAs?

Last Wednesday, the SEC announced an expansion to the definition of “accredited investor” to include individuals based on professional certifications and inside knowledge of issuers while keeping the old wealth and income thresholds the same. What does this mean for RIAs, their clients, and for capital markets?

Transactions

Gin, Business Valuation, and Ryan Reynolds

Earn-Outs in RIA M&A

Earn-outs are commonly used in RIA deals, and we expect contingent payments to make up an even larger percent of deal consideration for the next few months, quarters, or years depending on how long the current economic uncertainty lasts.  And while we hope most of our clients would be thrilled by the prospect of $335 million in upfront cash payments, we don’t want you to end up feeling as Ryan Reynolds did last week.  In this post, we explain what an earn-out is, why they are commonly used in RIA transactions, and how earn-outs may be used as a saving grace for deal activity in the current economic environment.

COVID-19 Coverage Industry Trends

Don’t Waste This Crisis

Tune Your Business Model for Greater Resiliency

The value of RIAs and the future of transactions in the industry ultimately comes down to the health of the individual firms. Fortunately, there is a relatively straightforward way to assess the financial well-being of your firm, and ways of taking corrective action if your firm’s future is threatened.

COVID-19 Coverage Industry Trends

Where Are RIA Valuations Today?

Matt Crow's Podcast Interview with Mindy Diamond

This is our first blogpost in three weeks. As the Coronavirus pandemic set in across the United States, Mercer Capital adjusted to working remotely about as smoothly as I could have hoped. The RIA team here at Mercer Capital struggled to find appropriate topics to cover in our weekly blog. Regular “business as usual” topics seemed out of place, and writing about very current events, like the massive dislocations in the structure of markets, isn’t why our readers spend their precious minutes absorbing our blog. For a couple of weeks, it seemed better to say nothing than to say the wrong thing. Fortunately, Mindy Diamond of the financial advisory recruiting firm, Diamond Consulting, asked if I would help her with a podcast about the impact of the pandemic on RIA valuations and, consequently, on transaction activity.

If you don’t subscribe to the Diamond podcast, Mindy hosts the all-stars of the RIA universe like Shirl Penney, David Canter, Mark Tibergien, and Liz Nesvold. Mindy also throws in a few mere mortals such as myself for variety – and digs until she gets well past the talking points. I hope you enjoy listening to this as much as I enjoyed the interview.

Industry Trends Transactions Wealth Management

Don’t Get Distracted by Franklin/Legg and MS/E-Trade

Creative Planning’s Minority Sale is the Most Consequential RIA Deal So Far in 2020

It’s hard to imagine, but the most significant piece of news for the RIA community so far this year happened less than three weeks ago and is already almost forgotten: Peter Mallouk sold a minority stake in his firm, Creative Planning, to private equity firm General Atlantic.  The transaction is easily one of the largest, if not the largest, minority transaction in the history of the RIA industry, and potentially provides a blueprint for others to follow.

Wealth Management

Are Wealth Management Margins About to Get Buried?

SchwabiTrade isn’t the Only Threat to the Most Consistent Profit Stream in the RIA Community

It’s hard to see the advent of SchwabiTrade as a good thing for the RIA community – especially the wealth management community. If Schwab is looking to recapture margins from zero commission trading and low rates on sweep accounts, it need look no further than the ten thousand plus RIAs now in its eco-system.

Investment Management

Mercer Capital provides RIAs, trust companies, and investment consultants with corporate valuation, litigation support, transaction advisory, and related services