A weekly update on issues important to the Investment Management industry
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.
Revenue multiples are cited perhaps as much as any other valuation metric in the RIA industry. In this week’s post, we focus on their key drivers and ways to improve the value of your management fees.
For this week’s post we’re introducing our whitepaper on compensation structures for investment management firms. This whitepaper is designed to help you navigate the various compensation models to optimize firm growth and employee retention.
Earlier this month, the Federal Trade Commission (FTC) announced a proposed ban on non-compete agreements in employment contracts. If enacted, the proposed ban would prohibit a common provision of employment agreements that employers use to limit employees’ ability to compete.
Last week, The Association of Trust Organizations held its annual meeting at the JW Marriott in Las Vegas to discuss industry trends, practice management, and recruitment during the Great Resignation. As a sponsor and panelist, we outline 5 takeaways from the meeting in this week’s blog.
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.
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?
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.
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.
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.
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.
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.
After a year off, ATO held its annual meeting at the Ritz-Carlton in Amelia Island, Florida to discuss industry trends, practice management, transaction activity, and the current competitive landscape.
In this week’s post, we discuss our main takeaways from the meeting.
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.
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.
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?
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.
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.
This week we discuss why RIA management teams need to look a step or two beneath the surface to understand why their firm is growing.
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.
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.
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.
