RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

Category

Practice Management


Capital Budgeting for Team Building

Tools for Long-Term Greedy Practice Management

The recent cancellation of Apple’s decade-long “Apple Car” project underscores the opportunities that capital budgeting offers for strategic decision making. Capital budgeting is a modeling exercise that has applications in the RIA community as well, where resource allocation decisions are more likely to involve human capital as opposed to equipment. This week, we explore the concept of returns to labor versus returns to capital in investment management, illustrating how long-term strategic thinking about human capital can lead to significant returns using the same tools integral to decision making at industrial concerns.

Transactions

7 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, 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 our seven considerations for your RIA’s buy-sell agreement.

Margins and Compensation

Evaluating Your Firm’s Margin

An RIA’s margin is a simple, easily observable figure that condenses a range of underlying considerations about a firm that are more difficult to measure.  As much as a single metric can, margins reflect the health of a firm—indicating whether a firm has the right people in the right roles, whether it’s charging enough for services, whether it has enough (but not too much) overhead, and much more.  But when assessing your firm’s margins, it’s important to consider the context of the firm’s ownership and compensation structure and also the tradeoffs associated with margins that are too high or too low.

Speed, Velocity, and Momentum

The Best Measure of RIA Success

Market performance gives you speed.  Employee performance gives you velocity.  Practice management gives you momentum.  If you want to be successful, focus on building momentum.

Margins and Compensation Transactions Trust Companies

5 Takeaways from the Association of Trust Organizations’ (ATO) 2023 Annual Meeting

During ATO’s annual meeting in New Orleans, industry experts weighed in on pressing topics for independent trust companies. Key discussions revolved around the limited impact of the FTC’s proposed ban on non-compete agreements, the potential advantages of AI in trust administration, and the unique financial trends and risks observed in the TrustCo sector. For those in the trust industry seeking insights on its current state, this conference provided invaluable perspectives and recommendations.

Unpacking Your RIA’s Income Statement

Performance Measurement Is More than Profits and Losses

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.

Succession Planning: RIAs Have Options

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.

Asset Management Margins and Compensation

A Little Less Conversation, A Little More Compensation

Compensation Structures for Investment Management Firms Whitepaper

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.

Transactions

4 Considerations for Your RIA’s Buy-Sell Agreement

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.

Current Events Industry Trends Transactions

ISO: Cheap Capital

All Models Are Wrong, Some Are Useful

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.

Transactions

Four To-Dos Before You Sell Your Investment Management Firm

Considerations for Every RIA Owner

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.

Current Events Industry Trends

Common Valuation Misconceptions about Your RIA

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

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.

Margins and Compensation

RIA Margins: How Does Your Firm’s Margin Affect Its Value?

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.

Current Events

An RIA’s Independence Is Valuable

Selling Control Is Losing Control

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.

Succession Planning for Investment Management Firms

The Best Time To Plan Is Now

Succession planning has been an area of increasing focus in the investment management 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.

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.

Investment Management

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