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RIA Valuation Insights

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December 13, 2024 Practice Management Valuation

Are Difficult Partner Discounts Applicable to RIAs?

A few months ago, our team attended a business appraisal conference in Portland, Oregon, where we learned about a case involving a “Difficult Partner Discount.” Since we’re often hired when business owners can’t agree on price, we’re well aware of partnership disputes, but are pretty confident we’ve never directly applied a “Difficult Partner Discount” to the value of a business or interest therein. That doesn’t mean that partner disputes and departures can’t significantly impair the value of a company, which we address in this post.

December 6, 2024 Practice Management

The Four Types of RIAs

And What It Means for Practice Management

No two RIAs are identical but broadly speaking, firms that seek to serve the same types of clients tend to end up with similar-looking business models. A firm’s structure tends to reflect the types of clients the firm seeks to serve and the value proposition it offers to those clients. The result is that firms tend to cluster around a handful of distinct models, and identifying what those models are and how they differ can be a useful exercise both in analyzing a particular firm and in thinking about practice management issues.

November 27, 2024 Current Events Industry Trends

Recap or Rescue?

CI Financial Has One Kind of Leverage, ADIA Has Another

Abu Dhabi has been on a buying spree, announcing this week that their sovereign wealth fund was acquiring CI Financial, taking it private just over a year after a Bain-led consortium invested US$1 billion in the publicly traded investment management firm. We suspect the terms of the Bain deal formed the predicate to this week’s announcement.

November 21, 2024 Transactions

Whitepaper Release: Purchase Price Allocations for RIAs

There’s been a great deal of interest in RIA acquisitions in recent years from a diverse group of buyers ranging from consolidators, other RIAs, banks, diversified financial services companies, and private equity. These acquirers have been drawn to RIA acquisitions due to the high margins, recurring revenue, low capital needs, and sticky client bases that RIAs often offer. Following these transactions, acquirers are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. In this whitepaper, we describe the PPA process, including attributes unique to the investment management industry.

November 15, 2024 Current Events

How Will Trump’s Second Term Affect the RIA Industry?

Now that the dust has finally settled on the 2024 election, we can turn our attention to its expected impact on the investment management industry. One of the most impactful expected changes is new leadership at the SEC and a reversal of the prior administration’s ESG and crypto initiatives. It’s difficult to say how the market is digesting these prospective changes in the RIA industry, but the coming weeks will likely determine if the current SEC chairman is stepping down and who Trump’s appointee might be. In this week’s post we review these potential changes and their expected impact on the industry.

November 8, 2024 Practice Management Valuation

Organic Growth and RIA Valuations

Organic growth is a key metric for the RIA industry, and it’s one that varies widely across firms. As such, it’s a key differentiator between firms, and it’s also an impactful assumption in determining a firm’s value. In this week’s post we explore organic growth trends in the industry and the impact of organic growth on valuation.

November 1, 2024 Practice Management Valuation

Component Analysis of RIA Returns

A Method to Examine Valuation, Risk Management, and Return Optimization

A racecar is an example of something that, as a whole, is greater than the sum of its parts. An RIA is another example. But, breaking down an RIA into constituent functions yields certain understandings that cannot be seen clearly by focusing on the whole. In this post, we think about what can be learned from component analysis of RIA returns.

October 25, 2024 Alternative Asset Managers Current Events Transactions

RIA Aggregator Investments Trick or Treat

Are Longer Holding Periods a Viable PE Strategy or Just an Extend-and-Pretend Tactic?

A recent CityWire article noted that private equity firms are extending their holding periods for RIA aggregator firms to take advantage of the industry’s higher margins and long-term growth prospects. This stalling tactic shouldn’t spook their LPs since the RIA sector is renowned for its recurring revenue, above-average margins, and demonstrated ability to grow cash flows over an extended period of time. Not many industries have businesses that can sustain The Rule of 40, which posits that venture investors prefer to invest in businesses in which the profit margin plus the growth rate adds up to at least 40%. The investment management industry is a notable exception since it typically boasts EBITDA margins in the 20% to 30% range and annualized growth in revenue on the order of 10% to 15%. So what’s so scary about paying +15x EBITDA for these businesses? We explore in this week’s post.

October 18, 2024 Alternative Asset Managers Industry Trends

Alternative Asset Managers Outperform as RIA Sector Gains Momentum

Alternative asset managers fared particularly well during favorable market conditions for the RIA sector. Over the past year, both alternative asset managers and large RIAs (with assets under management, or AUM, exceeding $250 billion) outperformed the S&P 500, achieving gains of 64.6% and 37.7%, respectively. As these dynamics continue into Q4 2024, the outlook for continued multiple expansion and robust deal activity for alternative asset managers remains favorable.

October 10, 2024 Industry Trends Transactions

RIA M&A Update: Q3 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 September 2024 Wealth Management M&A Transaction Report listed 155 deals through September 2024, down 11% from the 174 deals executed during the same period in 2023. As RIA deal activity experienced a greater decline than the broader M&A market, we explore what this means for your RIA.

October 4, 2024 Industry Trends

RIA Market Update: Q3 2024

RIAs outperformed the S&P in the third quarter of 2024, with alternative asset managers experiencing the strongest returns amid multiple expansion. All groups examined experienced growth in AUM and revenue year-over-year. We explore further in our Q3 2024 Market Update.

September 25, 2024 Margins and Compensation Practice Management

Striking the Right Balance Between Margins and Compensation

In the investment management world, evaluating a firm’s margin isn’t as simple as “more is better.” For RIAs, margin reflects efficiency, but it also reflects the firm’s tradeoffs with compensation.  Investment management is a talent business, and striking the right balance between margin and employee compensation that allows the firm to attract, retain, and incentivize talent is critical to an RIA’s success.

September 20, 2024 Practice Management Wealth Management

Five Ideas to Turn Your RIA’s Success Into Momentum

To the surprise of many, it’s been another very good year for the RIA community — but success can be fleeting. Whatever brings about the rollover in industry trend lines, we all know it’s coming at some point. So, if 2024 is indeed the peak of the cycle for the investment management industry, what will you one day wish you had done now?

September 13, 2024 Current Events

Does This Presidential Election Matter to the RIA Industry?

For some reason, we get this question every four years or so: does this election matter to the RIA industry? Let’s start by saying that with all of the hot-button issues the candidates are currently squabbling about, the RIA industry does not appear to be top of mind for the former president and current vice president. We, therefore, have to step back and think about what either candidate’s election would mean for the broader financial services industry, taxes, and stock market returns, which we cover in this week’s post.

September 6, 2024 Active Management Industry Trends Insights Practice Management

Are Retirement Plans an Underappreciated Growth Opportunity for RIAs?

Despite the growth of the defined contributions sector, many RIAs have avoided retirement plans in favor of larger opportunities. This leads to the question: are retirement plans an underappreciated growth opportunity for RIAs?

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.