A weekly update on issues important to the Investment Management industry
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.
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!
In a surprising move, Goldman Sachs has sold its Personal Financial Management (PFM) division, aimed at mass affluent clients, just four years after acquiring it for $750 million. The division wasn’t as profitable as Goldman’s core asset and wealth management businesses, prompting a pivot back to their expertise in ultra-high net worth clientele.
Measuring the financial performance of an RIA usually starts with GAAP statements, but it shouldn’t end there. Generally Accepted Accounting Principles (GAAP) have their place, but are too vague and nonspecific to provide much in the way of strategic direction for an investment management business. In this post, we propose a path to break down your financials into key performance metrics, giving your leadership a more constructive way to think about what builds value in an RIA.
The RIA industry is facing a potential succession crisis, with many firms still helmed by their founders and lacking in non-founding shareholders. Although succession planning is vital for the long-term success of these firms, it is often sidelined in favor of immediate growth strategies. This article delves into various solutions for RIA principals, from internal transitions to external acquisitions, highlighting their benefits and potential drawbacks.
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.
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.
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.
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.
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.
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.
This week’s post discusses the importance of regularly reviewing and understanding the terms of buy-sell agreements for RIAs, as these agreements can often become sources of contention when unexpected events occur. We highlight issues related to determining the transaction price during a buy-sell event, with scenarios such as fixed-price and formula pricing causing potential misunderstandings or disputes. We also offer advice on avoiding such conflicts, such as getting your RIA valued regularly to manage expectations and drafting fair pricing mechanisms, urging owners to familiarize themselves thoroughly with their buy-sell agreements.
Understanding the intricate complexities of buy-sell agreements can provide a basis for shareholder transactions and mitigate costly legal disputes down the road. We explain the pitfalls of rules-of-thumb based valuation measures, the importance of the ‘As Of’ date, the necessary qualifications of your appraiser, and how updating your agreement annually can manage expectations and avoid surprises. Stay informed and avoid the inevitable challenges by familiarizing yourself with these key components of a well-crafted buy-sell agreement.
While closing a deal is an important milestone, it’s not the end of the process. After the ink dries on the purchase agreement, there’s a host of issues that the acquiror must address regarding the integration of and accounting for the acquired firm. In this blog post, we address one such post-transaction accounting issue. After a transaction, acquirers are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. This post explores the purchase price allocation process as it relates to acquisitions of assets and wealth management firms, highlighting the valuation considerations surrounding intangible assets like customer relationships, tradename, non-competition agreements, and the assembled workforce.
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.
The intricate journey of selling a business you’ve built can be daunting, filled with complex emotions and countless considerations. This process, particularly in the investment management space, requires thorough preparation, strategic thinking, and an understanding of the many dynamics involved. In this post, we explore four critical areas that every investment manager must consider: developing a pragmatic pricing expectation, establishing a solid rationale for selling, preparing your firm’s financial documents, and understanding the tax implications of different deal structures.
CI Financial’s pivot from a planned IPO to the sale of a 20% convertible preferred stake of its US wealth management division to a consortium of institutional investors is not only a significant move for CI Financial but also sends ripples through the wealth management industry. In this post, we explore the details of this transaction, the potential consequences for CI Financial, and the broader implications for the wealth management industry.
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.
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.
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.
2022 was a tough year for the RIA industry and the stock market, as persistent inflation, rising interest rates, and geopolitical tensions shook the economy. Asset management firms felt the pressure, but what factors drove this decline and how did it impact the industry? Discover the challenges faced by both active and passive funds, and explore the outlook for asset managers in the face of an uncertain future.
RIA M&A activity has remained resilient through the first quarter of 2023, even as macro headwinds have emerged for the industry over the past year. Fidelity’s March 2023 Wealth Management M&A Transaction Report listed 68 deals through March 2023, up 19% from the 57 deals executed during the same period in 2022. These transactions represented $108.3 billion in AUM—a 21% increase from the first quarter of 2022.
RIAs started the quarter strong, but bank failures and interest rate hikes led to underperformance. Alternative asset managers, however, saw a last-minute rally during the final few days of the quarter, leading to this category outperforming the S&P during the period.
Harry Truman kept a sign with his personal slogan, “The Buck Stops Here,” on his desk. The reverse side of his sign, which faced the President, says, “I’m from Missouri.” Specifically, Truman grew up in Independence, Missouri, and took pride in his hometown. RIAs would be well advised to value their independence as much.
