RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

Category

Margins and Compensation


How EBITDA Margins Affect Revenue Multiples

Whenever someone asks us what their RIA is worth as a multiple of revenue, we respond by asking about their firm’s EBITDA margin. This week’s blog post explores how RIAs can enhance their value by focusing on EBITDA margin, revealing the pivotal role of profitability in investor attractiveness. It also provides strategic insights for balancing growth and profitability.

Transactions

Assessing an RIA’s Quality of Earnings

Don’t Pay a Premium for a Project

Quality of earnings projects look at aspects of profitability that go well beyond audited financials. They include detailed analysis of revenue and expenses, and derive a measure of normalized earnings more meaningful than simple reported results, even if the presentation of those results is accurate.

Practice Management

Evaluating Your Firm’s Margin

An RIA’s margin is a simple, easily observable figure that condenses a range of underlying considerations about a firm that are more difficult to measure.  As much as a single metric can, margins reflect the health of a firm—indicating whether a firm has the right people in the right roles, whether it’s charging enough for services, whether it has enough (but not too much) overhead, and much more.  But when assessing your firm’s margins, it’s important to consider the context of the firm’s ownership and compensation structure and also the tradeoffs associated with margins that are too high or too low.

Asset Management Industry Trends Mutual Funds

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.

Practice Management Transactions Trust Companies

5 Takeaways from the Association of Trust Organizations’ (ATO) 2023 Annual Meeting

During ATO’s annual meeting in New Orleans, industry experts weighed in on pressing topics for independent trust companies. Key discussions revolved around the limited impact of the FTC’s proposed ban on non-compete agreements, the potential advantages of AI in trust administration, and the unique financial trends and risks observed in the TrustCo sector. For those in the trust industry seeking insights on its current state, this conference provided invaluable perspectives and recommendations.

Asset Management Practice Management

A Little Less Conversation, A Little More Compensation

Compensation Structures for Investment Management Firms Whitepaper

Labor is the single largest expense for any investment management firm, but beyond that simple fact, there is surprisingly little similarity regarding how the thousands of wealth managers, asset managers, independent trust companies, and investment consulting firms pay their people.  Compensation studies show considerable variances in how much firms pay for certain positions, and the character of remuneration — salary, bonuses, equity compensation, benefits — varies as a function of firm history, economics, and culture.

Compensation Structures for RIAs

Part II

Part I of this series focused on variable or bonus compensation, this week we cover the equity component. If the other forms of compensation are meant to attract (salary) and retain (bonus) qualified talent, RIA equity is intended to align shareholder and employee interests while rewarding long-term contributions to firm growth and value. This structure inherently blends returns to labor (employee comp) with returns on investment (shareholder distributions) by its very design. It is typically the most complicated and misunderstood component of RIA compensation but can be highly effective when implemented correctly. 

Compensation Structures for RIAs

Part I

The selection, implementation, and adaptation of compensation models significantly influence an RIA’s profits and the financial lives of its employees and shareholders. In part 1 of the series, we discuss the role of variable compensation, a critical component of RIA compensation models, in motivating employees and promoting business growth. We show how strategic incentive structures can better align the interests of employees with those of the company, effectively balancing risk and reward while fostering growth and resilience in varying market conditions.

Practice Management

RIA Margins: How Does Your Firm’s Margin Affect Its Value?

Curious about what makes a firm’s margin a powerful indicator of its performance? We explain the “typical margin” for RIAs and how different segments of the investment management industry have varying margins based on their business models. Learn why future margin prospects are more significant than the current margin when evaluating the worth of an RIA and how to protect margins in a rapidly changing industry, and how to generate stable, improving margins that lead to higher valuation multiples when the firm is eventually sold.

Compensation Structures for RIAs: Part II

There are three basic components of compensation for investment management firms: Base salary/Benefits, Variable Compensation/Bonus, and Equity Compensation. This week we focus on Equity Compensation.

Equity incentives serve an important function by aligning the interests of employees with that of the company and its shareholders. While base salary and annual variable compensation serve as shorter-term incentives, equity incentives serve to motivate employees to grow the value of the business over a longer time period and play an important role in increasing an employee’s ties to the firm and promoting retention. While implementing an equity incentive plan will typically have a dilutive impact on existing shareholders, a properly structured plan will facilitate attracting and retaining the right talent and motivating participating employees to grow the value of the business over time. In that sense, a well-structured equity incentive plan is accretive to existing shareholders, not dilutive.

Compensation Structures for RIAs: Part I

Compensation models are the subject of a significant amount of hand-wringing for RIA principals, and for good reason. Out of all the decisions RIA principals need to make, compensation programs often have the single biggest impact on an RIA’s P&L and the financial lives of its employees and shareholders.

In part one of this series, we focus our attention on the variable compensation component. In the coming posts, we’ll address additional compensation considerations such as equity compensation options and allocation processes.

RIA Margins – How Does Your Firm’s Margin Affect Its Value?

An RIA’s margin is a simple, easily observable figure that encompasses a range of underlying considerations about a firm that is more difficult to measure, resulting in a convenient shorthand for how well the firm is doing. Does a firm have the right people in the right roles? Is the firm charging enough for the services it is providing? Does the firm have enough–but not too much—overhead for its size? The answers to all these questions (and more) are condensed into the firm’s margin.

RIA Margins – How Does Your Firm’s Margin Affect Its Value?

An RIA’s margin is a simple, easily observable figure that encompasses a range of underlying considerations about a firm that are more difficult to measure, resulting in a convenient shorthand for how well the firm is doing.  Does a firm have the right people in the right roles?  Is the firm charging enough for the services it is providing?  Does the firm have enough–but not too much—overhead for its size?  The answers to all of these questions (and more) are condensed into the firm’s margin.

How Growing RIAs Should Structure Their Income Statement (Part II)

Compensation Conundrums

Personnel costs are by far the largest expense item on an RIA’s P&L, but we’ve found significant variation in how RIA owners think about compensating their employees (and themselves).  This is the second post of a two-part series on compensation best practices for growing investment managers which focuses on how to structure partner compensation. 

How Growing RIAs Should Structure Their Income Statement (Part I)

Compensation Conundrums

Personnel costs are by far the largest expense item on an RIA’s P&L, but we’ve found significant variation in how RIA owners think about compensating their employees (and themselves).  We’ll devote the next two posts to discussing best practices from an outsider’s perspective. This week, we address how to structure employee compensation when you are not ready to bring on an equity partner.

Industry Trends Wealth Management

Wealth Management: Then and Now

How the Wealth Management Industry has Transformed Over the Last Decade

As we enter the new decade, rather than taking time for self-reflection, we prefer to take a step back and reflect on the radical transformation of the wealth management industry over the last ten years. Wealth managers have been forced to adapt in order to maintain their client base and remain profitable, and while these changes have not been easy, they have transformed the industry into one that is more focused on its clients’ needs and better regulated to ensure the safety of its clients’ assets.

Practice Management

Staffing for Value

With last week’s release of the 2018 InvestmentNews Compensation & Staffing Study, trends in pay and performance expectations are making the rounds in the RIA community.  Even though we are a valuation firm, we are often asked to weigh in on compensation matters, as officer pay and firm value are typically intertwined. 

Asset Management Current Events

ESG Investing Comes of Age Despite (or Maybe Because of) Trump

Investment strategies that screen for environmental, social, and governance criteria (ESG) is a still developing product niche that has, until recently, been more about talk than action. The pitch is that investing in businesses that demonstrate broad-based corporate responsibility provides a pathway to management teams who think long term, mitigate risk, and lead their industries. The beauty of an investment product like ESG is client stickiness.

Asset Management Current Events

Brexit Just Accelerates Downward Trend in RIA Valuations

Gimme Shelter

Brexit’s full impact on the market is still to be determined, but a quick review of asset manager pricing reveals a valuation gap with the broader equity market that opened over the past twelve months, got much worse in June, and even accelerated over the past week. Sifting through the noise at quarter end, we pose, if market valuations in the industry are getting a haircut, what does that mean?

What is Normal Compensation at an Asset Management Firm?

Part 2

Investment management is a talent business, and that talent commands a substantial portion of firm revenue which often exceeds the allocation to equity holders. While there is no perfect answer as to what an individual or group of individuals should be compensated in an RIA, we can look to market data and compensation analysis, measured against the particular characteristics of a given investment management firm’s business model, to make reasonable assumptions about what compensation is appropriate and, by extension, what level of profitability can be expected.

RIA Compensation and Valuation: A Conundrum of Brobdingnagian Proportions

Part 1

A tradeoff in an investment management firm’s business model is that of compensation expense versus profit margin. Compensation is almost always the largest expense on an RIA’s income statement and, of course, has a direct impact on net income. In light of that, we consider two business models and the effect on value.

Look out below! As capital market valuations apex, so too will RIA margins

Few industries are as susceptible to market conditions as the typical RIA. With revenues directly tied to stock indexes (in the case of equity managers) and a relatively high percentage of fixed costs, industry margins tend to sway with market variations. While the concept of operating leverage is not new to anyone in the asset management industry, it is easy to forget how easy it is for margins to collapse in a market downturn.

Investment Management

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