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RIA Valuation Insights

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August 30, 2024 Current Events Practice Management

Funding Your RIA’s Buy-Sell with Life Insurance Just Got Much Harder

SCOTUS Compels Closely-Held Business Owners to Review a Potential Problem in Their Ownership Agreement

As long as I can remember, RIAs and other closely-held businesses have used corporate owned life insurance to fund redemption provisions in buy-sell agreements. That practice is now in doubt, as the U.S. Supreme Court recently ruled that entity-purchased life insurance is additive to value for fair market value purposes. Has SCOTUS rendered what was long-standing conventional wisdom useless, or is the ruling subject to interpretation? Time will tell. For now, readers of this blog post will want to study the ruling and its implications for their own buy-sell agreements.

August 23, 2024 Asset Management Valuation

Valuing Asset Managers

Read our updated complimentary whitepaper on valuing asset managers. Understanding the value of an asset management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, investment management firms exist in a narrow space between client allocations and the capital markets. They depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the risks and opportunities of a particular investment management firm is fundamental to developing a valuation.

August 16, 2024 Valuation

Handling RIA Ownership Disputes

When RIA owners can’t agree on the appropriate price for a shareholder buyout, we’re often jointly retained to value the departing member’s interest in the business pursuant to a buy-sell agreement.  Whether we’ve been court-appointed or mutually chosen by the parties to do the project, we’ve done enough of these over the years to learn that the process matters as much as the outcome. In this week’s post we describe the overall valuation process and common issues we’ve experienced surrounding RIA ownership disputes.

August 9, 2024 Trust Companies Wealth Management

Build, Buy, or Outsource

RIAs Need Trust Capabilities, but How?

Advising clients on estate planning is a core service offered by wealth management firms, and the best tool for meeting estate planning objectives is often some sort of trust. This dynamic places trust companies closely adjacent to wealth management firms, and, increasingly, RIAs have sought to internalize trust operations through various means in a bid to expand their capabilities and move upmarket to larger clients with more complex needs. For RIAs that can figure it out, there are opportunities for higher growth and retention at the margin relative to a field of competitors that lack robust trust capabilities.  

August 2, 2024 Industry Trends Valuation

RIA Value Is a Function of Liquidity

Is the Investment Management Industry Missing Part of Its Capital Stack?

For several years, RIA consolidation was fueled by cheap debt, compelling acquisition multiples, and AUM growth underpinned by rising markets. Today, debt isn’t free, acquisition multiples have been bid up, and public markets have become dependent on a very narrow list of equities for growth. Despite headwinds, the P.E. thesis of investing in the RIA space: sticky revenue, low capital intensity, and dependable margins, has survived the pandemic and rough market years like 2022. The missing element was and is the inaccessibility of public market equity to cash out the P.E. investment thesis and to provide replenishment capital to do new deals.

July 26, 2024 Industry Trends

Will Rate Cuts Improve RIA Multiples?

Most economists and market participants now believe the Federal Reserve will start cutting interest rates at its September meeting as inflationary trends show signs of easing. Naturally, we’re interested in how expected rate cuts will affect the investment management industry’s transaction multiples. Many industry observers believe anticipated rate cuts will have little or no impact on the sector since most RIAs don’t have any debt on their balance sheets. While it’s true that most investment management firms do not employ leverage in their capital structure, lower interest rates will nonetheless impact their cost of equity and, consequently, their valuations.

July 19, 2024 Industry Trends Trust Companies

Independent Trust Company Trends

One of the most frequently ignored sectors in the wealth management industry may be its first cousin, the independent trust industry.  While many still associate trust administration with banks, which account for more than 75% of the space, the growing prominence of independent trust companies is capturing the attention of many participants in the investment management community.  In this post, we examine current trends impacting independent trust companies.

July 12, 2024 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.

July 5, 2024 Industry Trends

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.

June 28, 2024 Industry Trends 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.

June 21, 2024 Current Events Transactions

Ken Fisher’s Deal Is Remarkable Because It Isn’t Remarkable

Fisher Investments has for many years been the Toyota Corolla of the RIA space. Not fancy. Not interesting. Not exclusive. Advertising for sales leads. Mass affluent customers. Meat and potatoes wealth management. Nothing remarkable, except for an exceptional growth story that led to a huge transaction.

June 14, 2024 Transactions Valuation

Whitepaper Release: Assessing Earnings Quality in the Investment Management Industry

For this week’s post we’re introducing our whitepaper on quality of earnings analysis in the investment management industry.  For RIA buyers and sellers, commissioning a QofE report is an essential element of the due diligence process.  In essence, a well-executed QofE analysis not only reveals why a firm is profitable but also assesses the likelihood of maintaining and enhancing that profitability after the transaction.  This comprehensive approach ensures that both buyers and sellers make well-informed, strategic decisions in the RIA industry.

June 7, 2024 Current Events Transactions

Why Haven’t Higher Interest Rates and Inflation Derailed RIA Dealmaking Activity?

Just over 30 years ago, the Memphis Area Transit Authority (“MATA”) made the dubious decision to construct a trolley line traversing most of the city’s downtown area, and it hasn’t gone well. If MATA could do it all over again, I suspect they would permanently closed the trolley system altogether, given the issues they’ve had over the years. Last year, many RIA industry participants expected a similar cessation to dealmaking in the sector following the adverse impact of higher interest rates and inflation on investment managers’ AUM balances and profitability in 2022.  Fortunately for the industry’s bankers, these economic headwinds haven’t derailed the sector’s M&A momentum.

May 31, 2024 Transactions Valuation

Selling Your RIA? Five Ways to Bridge the Valuation Gap

Before parties to an RIA transaction can close, they must first agree on a price.  Narrowing that bid/ask spread is tricky, which is often why negotiations between prospective buyers and sellers fail.  Buyers and sellers naturally have different perspectives that lead to different opinions on value:  Where a seller sees a strong management team, a buyer sees key person risk. Unsurprisingly, these different perspectives on the same firm lead to varying opinions on value, and the gap can be substantial.  Bridging that gap is key to getting a deal done.  We address five ways buyers and sellers can bridge a valuation gap. 

May 24, 2024 Margins and Compensation Practice Management Transactions

Formula Pricing Gone Wrong

What Happens If Your Buy-Sell Agreement Prices Your Firm Too High or Too Low?

More often than not, the formula prices we encounter do more harm than good. The simplicity of formula pricing equations means they don’t consider important factors like debt, non-recurring items, loss of key staff or large customers, market conditions, or offers to purchase. Formulas can ground expectations but may set expectations unrealistically low or high, provide a false sense of security, and encourage partner behaviors that do not support the business model.

May 17, 2024 Asset Management Practice Management Transactions

Are Toxic Cultures the Silent Killers of the Asset Management Industry?

We’ve written about the external headwinds facing asset managers relative to other sectors of the investment management industry with scant reference to what actually causes many of them to fail: toxic cultures.  As valuation analysts, we’re more fixated on the quantitative measures of an asset management firm, like investment performance and client retention, so we often turn to actual industry participants to get the story behind the numbers.  Paul Black, CEO of WCM Investment Management, a $67 billion asset manager headquartered in Laguna Beach, California, provides great insights on the impact of culture on the viability of a money management firm.

May 10, 2024 Transactions

Internal Transactions Are Still an Option for RIAs

With a constant stream of headlines about M&A and near-daily inquiries from prospective acquirers, it’s easy for RIA owners to get the impression that external transactions are the norm.  While internal transactions don’t generate headlines, prospective buyers (next-gen management) likely aren’t beating your door down to close a deal. While they may be less conspicuous, internal transactions are a viable avenue for succession planning and one that many RIAs accomplish successfully. 

May 3, 2024 Transactions

Should You Accept Rollover Equity?

Road to Riches or “Worst Idea Ever”

If you’ve been offered rollover equity as part of a sale of your investment management firm, this post should offer a few things to consider on your road to riches. Rollover equity has become a standard feature of deal consideration in the RIA industry. At one time, sellers were typically offered cash plus an earnout to sell their firm. Both of these forms of payment are still prominent, although cash consideration has waned. We expect rollover equity to remain a prominent feature of deal consideration for the foreseeable future.

April 26, 2024 Transactions

What to Look for in a Quality of Earnings Provider for RIA Transactions

RIA dealmaking remains fairly robust, with a near-record year in 2023 and a significant uptick in year-over-year total transacted AUM during the first quarter of 2024.  In this environment, adequate due diligence is critical since the cost of corporate M&A failures is high for both buyers and sellers. A Quality of Earnings (or QofE) analysis is an essential component of transaction diligence for both buyers and sellers. Optimizing your transaction diligence requires assembling the right team. We discuss the five things RIA buyers and sellers should look for when evaluating potential QofE providers.

April 19, 2024 Alternative Asset Managers Asset Management Industry Trends

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.

April 12, 2024 Transactions

RIA M&A Update: Q1 2024

Following a year where deal volume in the RIA industry nearly matched the all-time high of 2022, RIA M&A activity cooled in the first quarter of 2024. RIA deal activity experienced a greater decline than the broader M&A market, with activity dropping 29% compared to the M&A activity for all industries, which fell 9%. However, despite the decline in the total number of deals, there was a significant uptick in total transacted AUM during 2024. Total transacted AUM through March 2024 was $139.2 billion—a 63% increase from the same period in 2023. Get the details in this week’s post.

April 5, 2024 Industry Trends

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.

March 29, 2024 Transactions

Revenue Share Transactions: Considerations for RIAs

Revenue share transactions offer a strategic option for RIA owners looking to monetize a portion of their firm without ceding control, addressing needs for succession, growth capital, and liquidity. This structure benefits sellers by allowing minimal operational interference post-transaction, as the investor’s return is tied to top-line revenue rather than bottom-line profit. However, revenue shares shift risk to common shareholders and require careful structuring to function effectively over time.

March 22, 2024 Practice Management

An Ontological Approach to Investment Management

Review of “Winning at Active Management” by William W. Priest et al.

“Winning at Active Management” by Bill Priest is an important book for managing a successful investment management practice. Emphasizing the importance of corporate culture, Priest argues against traditional command-and-control structures, highlighting that knowledge-based businesses like investment management thrive on intellectual contributions from all levels of the organization. The book provides a fresh perspective on the role of culture in mergers and acquisitions within the investment management sector, preaching that cultural compatibility is crucial for the success of such transactions.