A weekly update on issues important to the Investment Management industry
Valuation professionals generally accept that public market capital is cheaper and leads to higher valuations than can be achieved by closely-held businesses. The words and actions of market participants who invest in RIAs do not necessarily align with this belief.
You’re not the only one dealing with turnover. The pandemic spawned the Great Resignation, and rising inflation means there’s probably a better salary (or signing bonus) out there for anyone that’s looking. The ensuing talent war has created more industry turnover than the end of broker protocol in 2017, and RIA principals are having to invest more time and resources into recruitment and retention than ever before.
“Chaos isn’t a pit. Chaos is a ladder.” This phrase comes to mind as we discuss ways for smaller RIAs to capitalize on this chaos in this week’s post.
RIA M&A activity and multiples have trended upwards for more than a decade now, culminating in new high watermarks for both activity and multiples set late last year. Deal momentum continued strong into the first quarter, but we sense at least initial signs of slowing as the macroeconomic backdrop has deteriorated.
If you haven’t already, this may be a very good time to stress-test your financial condition to see what impact weakened markets, higher inflation, and rising interest rates will have on your firm. Unlike most things in finance, these other factors that accompany higher interest rates exacerbate the negative impact on RIAs, rather than mitigating them.
2021 may be remembered as both the busiest M&A year in history for the investment management industry, as well as the year in which valuation multiples in the space peaked. Transaction volume surged last year and carried into the first quarter, as deals negotiated during a period of cheap money, strong multiples, and the threat of changes in tax law drew both buyers and sellers to the negotiating table. It’s time to question what impact the change in market conditions has for the investment management space.
RIA M&A activity continued to trend upward through the first quarter of 2022 even as potential macro headwinds for the industry emerged. In this week’s post, we take a look at deal activity in Q1 2022 and discuss what the current M&A market means for your RIA.
By the spring of 2022, many of the industry trends facing and favoring wealth managers started to shift, threatening margins and valuations. Higher interest rates are undermining valuations in both debt and equity markets, taking an unusually strong toll on everything from U.S. treasuries to tech stocks. This shift creates a downward gravitational pull on assets under management, and therefore revenue, for wealth management firms. At the same time, inflationary forces are pushing up on both labor and non-labor expenses for RIAs. The consequence could be challenging for margins in 2022 and could deflate some of the positive influences on profitability that have provided a tailwind to RIA valuations for several years. Read more in this week’s post.
Publicly traded hedge fund managers and PE firms almost doubled in value during 2021 before nearly giving it all back in the first quarter. In this week’s post, we also examine the performance of other classes of RIAs and comment on the current market for privately held 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, acquirors are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA.
A purchase price allocation is just that—the purchase price paid for the acquired business is allocated to the acquired tangible and separately-identifiable intangible assets. As noted in the following figure, the acquired assets are measured at fair value. The excess of the purchase price over the identified tangible and intangible assets is referred to as goodwill. Because most investment managers are not asset intensive operations, the majority of value is typically allocated to intangible assets. In this week’s post, we discuss common intangible assets acquired in the purchase of private asset and wealth management firms including the existing customer relationships, tradename, non-competition agreements with executives, and the assembled workforce.
RIA group-think has been pro-consolidation for the past decade, and increasingly so. You’ve read the headlines about the pace of deals reaching a fever pitch last year and continuing into this year. We’ve been skeptical of the believed necessity for RIA consolidation in this blog in the past, and have yet to be dissuaded from our position. But opinions are only opinions, and facts are facts. This seems like an opportune moment to check our feelings against reality. How is RIA consolidation performing so far? The verdict from the public markets isn’t very encouraging. In this week’s post, we look at three publicly traded consolidators of wealth management businesses, Silvercrest, CI Financial, and Focus.
It’s de ja vu all over again. The volatility from the onset of the pandemic two years ago has been creeping back up as investors grapple with the global implications of the war in Ukraine. At the end of last year, most RIA owners were enjoying peak AUM and run-rate profitability. Since then, these measures have likely taken a substantial hit as the S&P 500 and NASDAQ are down 12% and 19%, respectively. When this happened two years ago, the market made a sharp recovery in the preceding quarters, but looking forward, we don’t know where the bottom lies. Most RIA principals are likely grappling with a sizable decline in management fees and earnings for the next billing cycle.
With taking a look at the VIX Index, we have assessed that the market volatility is likely here to stay – at least for a while. In this post, we explore what this volatility means for you and your RIA.
February’s CPI growth came in at 7.9% year-over-year (the highest level in recent memory), and the ongoing Ukraine conflict portends further supply chain challenges that could drive prices even higher. The front-end of the yield curve has shifted higher as market participants reason that rising inflation will force the Fed to raise rates sooner and by a greater magnitude than had been previously anticipated.
Historically, a flattening yield curve has signaled an end to a growth cycle, and so far in 2022 that certainly seems plausible. Markets are down and valuation multiples have declined significantly, particularly in high-flying tech stocks. Read this week’s post to find out what this means for the RIA industry.
This week we look to understand why private market multiples for RIAs have consistently embodied more optimism than that of their publicly traded peers. In doing so, we identify RIA investor preferences unique to the industry, and why such multiples may even be misleading indications of your firm’s value.
In continuing the series on buy-sell agreements, this week’s blog post was inspired by the Felcity Ace cargo ship in which the ship was carrying several thousand new Porches, Bentleys, and Volkswagens when fire spread quickly. This circumstance ultimately produced a metaphor for RIAs. When RIAs are formed, they often enter into some kind of shareholder agreement whereby the parties agree upon rules to buy or sell ownership interests under given circumstances. No one thinks much about it because the expectation of a terminal event – like sale of the business or the retirement of a member – is so far off in the future. It’s like loading 4,000 cars on a ship and sending it out to sea, assuming that, at the end of the journey, the cargo will be reliably delivered and offloaded in good condition. No one thinks about the ship while it’s on the way from one destination to another until a fire breaks out.
Following up on last week’s post, this week, we offer four additional considerations that you should be addressing in your firm’s buy-sell agreement. We’ve seen each of these issues neglected before, which usually doesn’t end well for at least one of the parties involved. A well-crafted buy-sell agreement should clearly acknowledge these considerations to avoid shareholder disputes and costly litigation down the road. We highly recommend taking another look at your buy-sell agreement to see if these issues are addressed before something comes up.
Working on your RIA’s buy-sell agreement may seem like an inconvenience, but the distraction is minor compared to the disputes that can occur if your agreement isn’t structured appropriately. Crafting an agreement that functions well is a relatively easy step to promote the long-term continuity of ownership of your firm, which ultimately provides the best economic opportunity for you and your partners, employees, and clients. If you haven’t looked at your RIA’s buy-sell agreement in a while, we recommend dusting it off and reading it in conjunction with the discussions in this blog post.
Over the next several weeks, we will be publishing a series of blog posts discussing the importance of buy-sell agreements and other adjacent topics for RIA owners. Ownership is perhaps the single greatest distraction for advisors looking to grow with their firm, but it can also be an opportunity to align interests and ensure continuity of the firm in a way that is accretive for the firm’s founders, next generation management, and clients. In this week’s post, we emphasize how having a clear and effective buy-sell agreement is imperative to minimizing costly and emotional drama that may ensue in times of planned or unplanned transition.
Last week we were surprised by a rare sighting, an S-1 filed by a prominent player in the RIA community. Dynasty Financial Partners seeks to raise $100 million in a public offering. The mercifully terse prospectus is less than 250 pages, and is recommended reading for anyone who swims (or fishes) in this pond.
Publicly traded hedge fund managers and PE firms nearly doubled in value during 2021. In this week’s post, we review the investment manager performance in 2021 by sector and AUM size and provide implications for your RIA in 2022 based on the results.
The asset management industry fared well in 2021 against a backdrop of rising markets and improved net inflows. Strong performance in equity markets was a major contributor to this performance. In addition, 2021 saw modest organic growth, although there were significant variances by asset class. In this week’s post, we discuss these issues and present our outlook for the industry.
Deal count is projected to reach new highs in the fourth quarter of 2021 as market activity continues to gain momentum, likely rounding out another record-breaking year for the RIA industry. In keeping with the rest of 2021, deal volume was driven by secular trends and supportive capital markets. As market activity remains robust, competition for deals continues to favor RIA aggregators such as Mercer Advisors, Mariner Wealth Advisors, Wealth Enhancement Group, and Focus Financial Partners (FOCS), to name a few. In this week’s post, we provide more information about the aggregators and offer our thoughts for the future.
As year-end approaches, we hope to spread some cheer with our annual RIA Holiday Quiz. There is a chance to win a prize with a perfect score! Don’t forget to supply your contact information so we know who to send the prize to. Merry Christmas!
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.
Knowing why you’re successful is a key to sustaining success. This week we offer five thoughts on turning your RIA’s success into momentum.
