RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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Industry Trends


Transactions

RIA M&A Update: Q2 2024

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 May 2024 Wealth Management M&A Transaction Report (most recent available data) listed 86 deals through May 2024, down 17% from the 103 deals executed during the same period in 2023. In this post, we explore what this means for your RIA now and looking forward.

RIA Market Update: Q2 2024

RIAs underperformed in the second quarter of 2024, with even the largest asset managers facing a decline in stock price in spite of a stronger asset base on which to collect revenue. Despite the price drop, all groups examined experienced growth in fundamentals year-over-year. We explore further in our Q2 2024 Market Update.

Transactions

New SEC Analysis of Form ADV Data

Insights on RIA Consolidation Trends

Consolidation is a theme that has a lot of traction in the RIA industry.  The prevailing narrative is that a growing multitude of buyers are scrambling to compete for a limited number of firms.  With the rapid pace of deal activity in the RIA industry, you might expect to see the number of firms decline. Despite consolidation pressures and record levels of acquisition activity, the reality is that the number of RIAs continues to increase, with new formations outpacing consolidation.

Alternative Asset Managers Asset Management

Market Resilience: Asset Managers Thrive Amidst Economic Volatility in 2023

Despite persistent inflation, elevated interest rates, and heightened geopolitical tensions, the asset management industry and the stock market as a whole saw a resurgence during 2023.  Our index of publicly traded asset management firms generally tracked the movement in the broader market, with stock prices for smaller asset managers (AUM under $250 billion) up 30.3% and large asset managers (AUM over $250 billion) up 22.0% over the year ended March 31, 2024, while the broader market (S&P 500) was up 29.9%. Read more about the market’s resilience and future outlook in this week’s post.

RIA Market Update: Q1 2024

With Valuations Up, Investor Interest Moves to Alts and Big-Name Managers

Share prices for most publicly traded asset and wealth management firms trended up alongside the broader market in Q1 of 2024. Alternative asset managers continued to outperform the S&P 500 and other RIAs, ending the quarter up about 12.6%. On a year-over-year basis, all sectors of RIAs experienced growth as the markets rebounded from the 2022 slump.  Read more for a full overview of RIA performance.

Wealth Management

Will Finfluencers Replace Financial Advisors?

The CFA Institute Research & Policy Center’s recent report reveals the significant influence of financial influencers (finfluencers) on the investment decisions of Gen-Z, underscoring the urgent need for the wealth management industry to adapt to the digital age. Highlighting a concerning gap, the report notes that a substantial portion of finfluencer content lacks necessary disclosures, potentially leading young investors to make decisions based on biased information.

Despite the challenges posed by finfluencers, the report suggests they offer a unique opportunity for RIAs to engage with the next generation of investors, advocating for strategic partnerships complemented by rigorous compliance and transparency measures. Read the details in this week’s post.

Current Events Transactions

Quality of Earnings Analysis for RIAs

The M&A space in the RIA sector has seen a marked increase in transaction activity over the past ten years, along with advancements in its supporting infrastructure. Professionalization of the buyer market has led to a more detailed examination of target companies’ earnings. Mercer Capital’s whitepaper highlights the importance of Quality of Earnings (QofE) analysis in presenting a more accurate picture of a company’s earnings and cash flows for both potential buyers and sellers.

Current Events

Navigating the Shifting Tides

Trends Shaping the RIA Industry in 2023 and Beyond

In 2023, the RIA industry witnessed growth and rebounded from the previous year’s slump, despite earlier concerns about inflation and high interest rates. This growth occurred alongside a shift in the financial landscape, where public firms in wealth management underperformed compared to the broader market and alternative asset managers. Additionally, RIAs have found the importance of data use, with many advisors using data to enhance portfolio decisions, operational efficiencies, and client relationships.

The Remarkable Resilience of RIA M&A Activity

Despite challenging macroeconomic conditions in 2023, RIA M&A activity demonstrated resilience, with Fidelity’s November 2023 report showing a 3% increase in deals compared to 2022. The total transacted AUM saw a notable 25% increase, with an average AUM per transaction rising by 21%. Factors contributing to this growth included consolidation forces in the industry, confidence in the macroeconomic environment, and significant investments by firms such as Mercer Advisors and CAPTRUST, as well as partnerships with private equity firms.

RIAs Finish 2023 with a Q4 Rally

Investor Interest Moves to Alts and Big-Name Managers

In Q4 2023, most publicly traded asset and wealth management firms saw share prices rise, with alternative asset managers seeing 21% growth, outperforming the S&P 500. Despite market growth, there was a decline in year-over-year revenue for most RIA sectors, attributable to fee compression. This report also highlights that larger RIAs (with AUM over $100 billion) generally outperformed the S&P 500, while smaller RIAs (with AUM under $10 billion) underperformed.

Insights

‘Twas the Blog before Christmas….

The 2023 Mercer Capital RIA Holiday Poem

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 2024.  For now, please enjoy the finest only holiday poem written about money management.

Active Management Asset Management Margins and Compensation

Can Active Management Survive a Bear Market?

The recent analysis by Bloomberg highlights the potential for a bear market to intensify the challenges faced by active money managers, including fee pressures, asset outflows, and growing competition from passive investing strategies. Despite headwinds and the rising popularity of passive products, the resilience of some active management firms suggests a future where the industry might see less competition and more opportunity for alpha. Despite higher market caps than in 2008, asset management firms face a contraction in earnings multiples, suggesting a complex outlook that balances risks with the potential for restructuring and consolidation within the sector.

Transactions

Consolidation in the RIA Industry?

A Look at Record-Pace RIA Acquisition

In the midst of robust M&A activity, the RIA industry defies typical consolidation trends, continuing to grow with new firm creation outstripping the pace of acquisitions. This expansion has been propelled by a shift from the broker-dealer model to a fiduciary model, alongside the allure of building valuable, saleable enterprises.

Alternative Asset Managers Asset Management

Alt Managers Race Ahead

A Resurgent Year for Investment Management Firms

In the recent financial landscape, alternative asset managers have significantly outpaced other categories, particularly in the RIA sector, demonstrating resilience and impressive gains amidst market volatility. While traditional asset managers have seen some pressure, larger entities, especially those in private equity, experienced notable growth and stability, largely due to their robust structures and strategic partnerships. The current trends underscore the importance of understanding nuanced market shifts, what these developments mean for various asset managers, and investment approaches in an evolving economic climate.

Current Events Transactions

RIA M&A Update

Although inflation has begun to subside and the stock market has rallied after a turbulent start to 2023, elevated interest rates and macroeconomic uncertainty have contributed to a slight decline in deal volume so far in 2023. Despite the slight decline in deal volume, total transacted AUM increased. In this week’s post we discuss some of the contributing factors of this, and what it means for your RIA.

Q3 2023: Alts Take the Lead as Other RIAs Lose Traction

Market Uncertainty and Fee Compression Trends Lead Investors to Take an Alternative Approach to RIA Investing

In Q3 2023, while most publicly traded asset and wealth management firms experienced share price decreases in tandem with the broader market, alternative asset managers stood out with about 10% growth. This deviation can be attributed to factors like market volatility since 2020, which has boosted demand for stocks of alternative asset managers due to their more predictable revenue streams. Furthermore, the shifting market conditions highlighted potential implications for individual RIAs.

Uncategorized

What’s Driving RIA M&A?

Global M&A activity has plummeted, and RIA consolidators have seen skyrocketing debt costs and eroding capital positions. Despite this, RIA M&A continues with little abatement. In this post, we dive into the factors supporting the relative strength of the RIA M&A market.

Where Is RIA Dealmaking Headed?

Matt Crow Interviewed for Barron’s Advisor Podcast

Steve Sanduski sat down with Matt Crow to talk about the state of the RIA industry for Steve’s Barron’s Advisor Podcast.  In the episode, Steve and Matt explore the main drivers of the recent M&A environment for RIAs, the pros and cons of consolidation, and when selling to a consolidator makes sense instead of pursuing internal succession. Enjoy!

Wealth Management

Trending: The Independent Trust Company

The independent trust industry has been flourishing, despite market turbulence, due to increased demand for trust administration services, the relative resilience of trust company fees, and demographic shifts favoring wealth growth. Companies are adapting to changes in the term structure of interest rates, benefiting from fee structures that provide stability in adverse market conditions, and capitalizing on the expanding pool of high-net-worth individuals. With evolving trust laws, growth opportunities tied to generational wealth transfer, and the importance of effective succession planning, independent trust companies are poised for a promising future in the competitive financial landscape.

Transactions

RIA M&A Update

The first half of 2023 witnessed a minor decline in wealth management M&A deal volume, but an increase in total transacted AUM and deal size, fueled by a surge in the number of deals with AUM over $1 billion and RIA partnerships with private equity firms. This robust RIA deal activity demonstrates the resilience of the sector in contrast to a significant decrease in overall M&A transaction value across all industries. As RIAs continue to offer a growth strategy for strategic buyers and investors, it is imperative for sellers to identify their motivations, the type of partner they seek, and align their goals with the buyer’s strategy to ensure post-transaction satisfaction.

Asset Management Wealth Management

Q2 2023: RIAs Finish Strong Following June’s Bull Market

Steady Interest Rates Calm Investor Nerves, Boosting RIA Performance

The second quarter of 2023 saw share prices for asset and wealth management firms reflect the broader market’s growth, particularly following the S&P 500’s transition into a bull market in June. However, smaller asset managers underperformed compared to their larger counterparts and the S&P 500, while earnings multiples for publicly traded RIAs saw an 8.8% increase due to a favorable interest rate environment and higher AUM balances. The upcoming report on Q2 M&A activity is set to provide further insight into these trends, and while comparisons with closely held RIAs require caution, focusing on core business practices can offer protection from market volatility.

Current Events Practice Management Transactions

ISO: Cheap Capital

All Models Are Wrong, Some Are Useful

The much-ballyhooed consolidation trend in the RIA space is in a state of transition. Many acquisition platforms, fine-tuned in an era of zero interest rates and plentiful equity capital, are challenged in the post-ZIRP environment. Picking up on economist George Box’s observation that “all models are wrong, some are useful,” it’s worthwhile to survey the acquisition landscape and see what worked and what still works.

Transactions

RIA Dealmaking in a Post-ZIRP Market

Terms Bridge Seller Expectations and Market Realities

The secret of selling your RIA for peak pricing lies in the terms, but it’s not as straightforward as it may seem. Investment management transactions these days involve creative deal terms, risk-sharing and evolving market conditions that keep the market bustling, despite a host of economic challenges. From managing buyer-seller relationships to balancing risk and reward, we explore how industry players are adapting to maintain the appearance of peak pricing, while carefully guarding against market downturns. Find out how the art of the deal is being redefined and learn how to navigate the market to achieve your transaction goals.

Current Events Practice Management

Common Valuation Misconceptions about Your RIA

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.

Investment Management

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