RIA Valuation Insights

A weekly update on issues important to the Investment Management industry


Industry Trends

In the Market for a Good Used RIA?

8 Tips for Being a Buyer in a Seller’s Market

A couple of times a week, we get calls from someone we’ve never met saying they’d like to talk with us about their RIA acquisition strategy. About half are RIAs or trustcos looking for expansion, and the other half are private equity or family offices. Very few are calling because they have a particular target in mind, fewer still have begun the process of negotiating with a potentially interested seller.

If your acquisition strategy these days is starting from scratch, you’re in a tough spot. There’s nothing on the lot, and what is available looks expensive. That doesn’t mean you should give up, though. In this post we offer some practical tips to pursue an acquisition strategy in this market environment, as well as the markets to follow.

Asset Management Wealth Management

Asset / Wealth Management Stocks See Mixed Performance During Third Quarter

After a Strong Summer, Public Asset Managers See Stock Prices Dip as Market Pulls Back in September

RIA stocks saw mixed performance during the third quarter amidst volatile performance in the broader market. In September, the S&P 500 had its worst month since March 2020, and many publicly traded asset and wealth management stocks followed suit.

In this week’s post, we illustrate what this means for your RIA and give a prediction on the outlook of the RIA industry.

Asset Management Current Events

“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.


Not Every RIA Buyer Is a Control Freak

Despite Conventional Wisdom, Some Investors Prefer Minority Positions

The pricing of minority transactions in the RIA space leaves some people scratching their head. Traditional valuation theory holds that investors pay less for minority interests than controlling interests. Reality suggests otherwise.

Consolidation in the RIA Industry

RIAs Are Being Acquired at a Record Pace, But Does That Really Mean the Industry Is Consolidating?

Consolidation is a theme that has a lot of traction in the RIA industry: that a growing multitude of buyers are scrambling to outbid each other for a limited and shrinking number of firms. With the rapid pace of deal activity in the RIA industry, you might expect to see the number of firms decline, as that is typically the norm for consolidating industries. But that’s not been the case in the RIA industry, at least yet. Despite consolidation pressures and record levels of acquisition activity, the reality is that the number of RIAs continues to increase, with formations outpacing consolidation.

Another way to track consolidation is to look at how assets under management are distributed across firms of different sizes, rather than at the number of firms. The industry hasn’t seen significant consolidation by this metric either. So what does all this mean for the industry? This post tackles that question.

To the Moon or Back to Earth?

RIA Valuations Have Increased Substantially Over the Last Year, but That Doesn’t Necessarily Mean These Stocks Are Overpriced

A few weeks ago we blogged about how RIA stock prices have increased over 70% on average over the last year. This rapid ascent begs the question if valuations have gotten too rich with the market run-up during this time. In this post, we answer this question.

Practice Management

Post-Pandemic Tax Planning for RIAs

Is It Time To Consider a Change in Your Corporate Structure, or Your Address?

Dynasty’s move from New York to Florida and UBS’s relocation to Tennessee got plenty of attention. Post-pandemic, we’re starting to hear of smaller RIAs contemplating similar moves. There’s plenty of opportunity, because most investment management firms still call high-cost, high-tax states home.

Current Events

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.

Asset Management

Value Finally Outperforms Growth After Twelve Year Lull

Value Stocks Are Finally Besting Growth, But Is It Sustainable?

Growth-style investments have outpaced their value counterparts by a considerable margin since the Financial Crisis of 2008 and 2009.  Propelled by an 11-year bull market from 2009 to 2020 and additional lift to tech stocks in a work-from-home environment, growth investing dominated value-oriented equities until just a few months ago.   Now, the long-running trendline appears to be rolling over.   

Current Events 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.

What Does “The Market” Say Your RIA Is Worth?

GameStop Theory in a Consolidating Industry

Long before Reddit investors discovered that you could Occupy Wall Street more effectively with out of the money call options than you can with tents, Porsche briefly turned itself into a hedge fund and used a similar tactic to try to take over Volkswagen.  The story sheds some light on how market pricing does, and does not, reveal the value of a business.  Benchmarking the value of an RIA off the behavior of a few aggressive consolidators has similar limitations.

RIA Industry Extends Its Bull Run Another Quarter

Continuation of Market Rebound Drives All Categories of Publicly Traded RIAs Higher in Q4 2020

Share prices for publicly traded investment managers have trended upward with the market since March’s collapse.  Aggregators fared particularly well over the last nine months on low borrowing costs and steady gains on their RIA acquisitions.  Traditional asset and wealth managers have also performed well over this time on rising AUM balances with favorable market conditions. Against this backdrop, we discuss recent market performance, implications for your RIA, and a potentially improving outlook.

COVID-19 Coverage

Silver Linings: Using Crisis to Improve Your RIA’s Health

Guest Post by Matt Sonnen of PFI Advisors

Early in the COVID pandemic, PFI Advisors published an article outlining how RIAs could perform an “Operational Diagnostic” to improve their profitability.  Matt Sonnen wrote, “For now, advisors are focusing on exactly what they should be doing – guiding their clients through this turmoil and keeping them calm and focused on their long-term financial goals.  When the time is right, however, I’ll forward this article to our clients so they can begin the work of focusing on the bottom line…”

Nine months later, most RIAs and their clients have recovered from the market volatility and ended up having a very good year, at least on paper.  Now’s the time for RIA principals to consider how they can advance their firms to be ready to meet the next challenge with greater ease.

We’re featuring Matt Sonnen’s wisdom on operational best practices and business strategy in our upcoming conference, RIA Practice Management Insights, on March 3 and 4. 

COVID-19 Coverage

Continuation of Market Rebound Drives Most Categories of Publicly Traded RIAs Higher in Q3

RIA Market Update

Share prices for publicly traded asset and wealth managers have trended upward during the second and third quarters after collapsing in mid-March with the broader market.  Alt asset managers have fared well over the last year as volatility and depressed asset prices have created an opportunity to deploy dry power and raise new funds in certain asset classes.  Traditional asset and wealth managers have generally moved in line with the broader equity market, while leveraged RIA aggregators have seen more volatility, both up and down, as the market bottomed in March before trending upward.

COVID-19 Coverage

Financial Advisors, Tell Your Clients to Gift Now!

Lower Asset Values Provide an Opportunity for Tax-Efficient Wealth Transfers Before November’s Election

Last week we covered Joe Biden’s proposed estate tax changes and their impact on family wealth transfers if he gets elected in November.  Proper estate planning can mitigate the adverse effects of higher taxes on wealth transfers, but the window to do so may be closing if we have a regime change later this year.  Further, the demand (and associated cost) for estate planning services may go up significantly in November, so you need to apprise your clients of these potential changes before it’s too late.

COVID-19 Coverage

Estate Tax Planning May Be the Next Surprise for RIA Community

2020 Chicanery Never Ends

2020 has been full of surprises, and the third quarter is bringing more.  The persistence of the pandemic and the consequent economic strain on many has shifted political winds in favor of the minority party.  If these trendlines don’t roll over between now and November 3, we’ll have a new executive and legislative regime and, with it, a redirection of tax policy.  It’s not too early to start thinking about what impact certain legislative changes will have on the RIA industry, especially with regard to estate tax law.

RIAs Rally After Worst Quarter in Eleven Years

The Industry Is Now in a Bull Market Following March’s Sell-Off

It probably doesn’t feel like it, but most RIA stocks are up over the last year. Over this time, we’ve had two bull markets and one bear market in one of the most volatile twelve-month periods. Against this backdrop, we discuss recent market performance, implications for your RIA, and a potentially improving outlook.

The Evolution of Rule-Based Valuation Metrics and Why They Still Don’t Work

One of our first blog posts addressed the fallacies of rule-based valuation measures in RIA transactions.  Our position hasn’t changed, but these so-called rules of thumb have certainly evolved over time.  In a recent podcast with Michael Kitces, industry transaction specialist Elizabeth Nesvold of Raymond James explains the history and rationale behind these changes.  For this week’s post we’ll discuss this evolution and why such measures are usually more misleading than meaningful.

COVID-19 Coverage

Why Are Small Cap RIAs Down 40% Over the Last Year?

Most Investment Managers Remain in Bear Market Territory Even as the Broader Market Recovers

Believe it or not, the S&P 500 is exactly where it was a year ago.  It’s been a wild ride, but most diversified investors probably haven’t done as bad as they think during this time.  Unfortunately, that’s not the case for the RIA industry, which is still reeling from the Coronavirus pandemic and numerous other industry-specific headwinds.  Such a divergence is unusual for an industry tied to market conditions, so this week we analyze the driving forces behind this disparity.

Investment Management

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