RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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Practice Management


Wealth Management

How Does Your RIA’s Client Base Affect Your Firm’s Value, and What Can You Do to Improve It?

We’re often asked by clients what the range of multiples for RIAs is in the current market.  At any given time, the range can be quite wide between the least attractive firms and the most attractive firms.  The factors that affect where a firm falls within that range include the firm’s margin, scale, growth rate of new client assets, effective realized fees, personnel, geographic market, firm culture, and client demographics (among others). 

In this post, we focus in on the client demographics factor, explain how buyers view client demographics, and explore steps some firms are taking to reach a broader client base.

Industry Trends

RIAs Are a Value Investment in a Growth Obsessed World

Maybe That’s Okay

We think of investment management firms as a “growth and income” play. The space has attracted capital specifically because RIAs produce a reliable stream of distributable cash flow with the upside coming from market tailwinds and new clients. For all the trade press touting interest in RIAs, investing trends over the past fifteen years have had a mixed impact on the investment management community.

For asset managers, cheap capital makes stock picking less important. Persistent alpha is harder to prove. Passive and alternative products are more competitive. Investment committees are surly. Fee pressure is rampant.

For wealth managers, cheap capital has made diversification look kind of pointless and bordering on stupid. In the rearview mirror, owning anything other than the S&P 500 has, since the credit crisis, looked like a mistake. While this may not have had an immediate impact on revenue and margins, it does nothing to cement advisor/client relationships.

But what about valuations? Where do RIAs fit in an environment that favors growth stocks?

Transactions

Bear Markets Cost RIA Sellers, But Boost Buyers

A Public Service Message That Earn-outs Aren’t Always Earned

One reason deal activity can remain strong in tough financial markets is that buyers can use earn-outs to control what they pay for deals, offering more money in the event that markets recover and justify higher valuations, and managing their outlays if performance lags. For sellers, the relevant consideration is bear markets may tank a big part of their expected deal consideration, well beyond their control. A falling tide may not simply work to the detriment of sellers, but also hand buyers a bargain purchase when markets improve. Earn-outs align interests in the near term but can provide asymmetric benefits in years ahead.

Asset Management Current Events Industry Trends

Schwab’s 2022 Benchmarking Study Offers Insights Into the RIA Industry

How Does Your RIA Measure Up?

Schwab recently released its 2022 RIA Benchmarking Study.  The survey contains responses from over 1,200 RIAs representing $1.8 trillion in AUM to questions about firm operating performance, strategy, and practice management.  The survey is a great resource for RIA principals to see how their firm’s performance and direction measure up against the average firm.  In our blog post this week, we highlight some of the key results of the survey.

Wealth Management

Value Adrift?

If You Don’t Know What’s in Your Buy-Sell Agreement, You Don’t Know What You Own

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.

Wealth Management

Additional Considerations for Your Buy-Sell Agreement

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.

Wealth Management

Three Considerations for Your RIA’s Buy-Sell Agreement

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.

Posturing for a Successful Succession

Failing to Plan is Planning to Fail

It is never too soon to start thinking about succession planning. There are many viable exit options for RIA principals when it comes to succession planning. This week we discuss six exit options to consider while planning your eventual business transition.

Transactions

Four “To Dos” Before You Sell Your Investment Management Firm

Considerations for Every RIA Owner

Selling the business you built from the ground up is a bittersweet experience. Many business owners focus their efforts on growing their business and push planning for their eventual exit aside until it can’t be ignored any longer. While this delay may only prove mildly detrimental to deal proceeds in other industries, in the investment management space, there are very few buyers who will be interested in YOUR business without YOU (at least for a little while).

Long before your eventual exit, you should begin planning for the day you will leave the business you built. There are many considerations for investment managers contemplating a sale, in this post we suggest four ways that you should start.

Transactions

Why Is No One Selling in a Seller’s Market?

Even in One of Hottest M&A Markets in Recent History, Most RIA Principals Still Do Not Plan to Sell Their Business in the Next Three Years.

Did you know 67% of RIA principals plan to sell, merge, or conduct a transaction through which they will leave the business in the next 5 years? Yet, only 36% have either a signed ownership agreement or strategy in place? There are some explanations to this disconnect that we discuss in this post. Because succession planning is so important, we conclude by discussing how to ensure a successful succession.

What Is Your Firm’s “Brand” Worth?

Building the Value of an RIA Involves Making it More Than a Group of Professionals

In this post, we look at brand value. Much of the debate over the value of investment management firms can be distilled into one question: what is the value of a firm’s brand? More than “what’s in a name?”, the question is an investigation into the relationship between client and investment management service provider. Do clients of your firm define their relationship as being with your firm, or with an individual at your firm?

Wealth Management

Succession Planning for Independent RIAs

The Best Time To Plan Is Now

Succession planning has been an area of increasing focus in the RIA industry, particularly given what many are calling a looming succession crisis. The demographics suggest that increased attention to succession planning is well warranted: over 60% of RIAs are still led by their founders, and only about a quarter of them have non-founding shareholders. Yet, when RIA principals are asked to rank their firm’s top priorities, developing a succession plan is often ranked last. However, if you’re a founding partner or selling principal, it’s never too soon to start thinking about succession planning. Proper succession planning needs to be tailored, and a variety of options should be considered.

Industry Trends

Post-Pandemic Tax Planning for RIAs

Is It Time To Consider a Change in Your Corporate Structure, or Your Address?

Dynasty’s move from New York to Florida and UBS’s relocation to Tennessee got plenty of attention. Post-pandemic, we’re starting to hear of smaller RIAs contemplating similar moves. There’s plenty of opportunity, because most investment management firms still call high-cost, high-tax states home.

Current Events Industry Trends

Common Valuation Misconceptions About Your RIA

Old Rules of Thumb, Recent Headlines, and the Endowment Effect

As a financial analyst, a CFA charter holder, and a generally reasonable person, I know that Zillow isn’t accurate; but as a homeowner, I can’t help myself.  When I am walking around my neighborhood, I always have the Zillow App open, and am speculating about how the “Z-estimate” for my house compares to my neighbors’.  And, of course, my house always is better. Why? Because I own it.  It’s called the endowment effect.  I (as a homeowner) am emotionally biased to believe that something (my house) is valued higher than the market would ascribe, simply because I already own it.

And you, the owner of an RIA, may believe your firm is valued higher than the market value too, and old rules of thumb and recent industry headlines amplify the problem.

2021 RIA Practice Management Insights Conference Recap

We want to thank everyone who attended or participated in our inaugural RIA Practice Management Insights conference last week.  We set out last year to create a conference geared towards the back-of-house issues that are critical to success, but don’t get as much attention as themes like M&A and consolidation at many conferences.  To that end, we were fortunate to be able to compile a speaker list full of well-known experts on various practice management topics like firm culture, marketing, managing your tech stack, and more.

Conference Speakers Will Shed Light on a New Day in the RIA Industry

Catching Up with the Future at the RIA Practice Management Insights Conference

The deficiency in the growth story of many RIAs is they employed lots of people to work “in” the business, but not enough to work “on” the business. Strategic thinking about practice management is a necessity in an industry that has been catapulted into the future. This post discusses why we put together the RIA Practice Management Insights conference.

Failing to Plan Is Planning to Fail

Just Because Everyone Else Is Doing It, Doesn’t Mean You Should Ignore Succession Planning

Next week, during the inaugural RIA Practice Management Insights conference, we will set aside some time to answer your questions about succession planning. We’ll cover some of these topics in more detail next week, but this post offers a preview of our thinking about various succession planning (and exit) options.

How RIA Owners Can Rethink Compensation

Money Talks

Salary and bonus discussions are some of the most stressful conversations business owners have each year, and RIA principals are no exception. Since personnel costs are by far the largest expense item on an RIA’s income statement, it is understandable that these principals frequently question (and are questioned about) their compensation decisions. While there is no one-size-fits-all formula for compensation, we have discovered three ways to ease some of the anxiety around these discussions.

Seven Considerations for Your RIA’s Buy-Sell Agreement

Working on your RIA’s buy-sell agreement may seem like a distraction, 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, your employees, and your 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 discussion in this post.

Being Human: The Secret to Authentic Advisor Videos

Guest Post by Megan Carpenter of FiComm Partners

Over the years, we have repeatedly said that the wealth management side of the investment management business is healthier than the asset management side.  Unlike asset managers whose clients are likely to jump ship after a few bad quarters, wealth management is based on client relationships and a manager’s ability to inspire confidence in his or her clients.   

Wealth managers spent their careers perfecting in-person communications to connect with clients.  2020’s transition to WFH made most of these communications virtual.  In this guest post, Megan Carpenter provides tips to improve your Zoom communication skills with clients.

Investment Management

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