A weekly update on issues important to the Investment Management industry
In the investment management world, evaluating a firm’s margin isn’t as simple as “more is better.” For RIAs, margin reflects efficiency, but it also reflects the firm’s tradeoffs with compensation. Investment management is a talent business, and striking the right balance between margin and employee compensation that allows the firm to attract, retain, and incentivize talent is critical to an RIA’s success. Read more in this week’s post.
In the ever-evolving wealth management sector, we see RIAs exploring ways to bolster their competitive edge, long-term sustainability, margin, and valuation. An increasingly common strategy involves integrating family office services, which extend core asset management to include comprehensive tax optimization, estate planning, philanthropy coordination, and lifestyle management. This often manifests as a multi-family office (MFO) model, serving multiple ultra-high-net-worth (UHNW) clients under RIA regulatory frameworks. In this week’s post, we discuss the strategy and if it can provide resilience for RIA margins.
Over the next two decades, an estimated $68 trillion is expected to transfer from Baby Boomers and Gen X to Millennials and Gen Z in what has been dubbed the “Great Wealth Transfer.” For RIAs and trust companies, this transition presents both opportunities and challenges that directly impact firm valuations. As client demographics evolve, investment management firms must adapt to retain AUM and navigate the valuation implications of this seismic wealth shift.
A frequent question among RIA owners is whether internal buyers, such as employees or partners, pay less for their equity stakes compared to external buyers, and if so, why pursue internal succession? The answer is straightforward: internal buyers typically pay less, sometimes significantly less, due to unique industry dynamics and the structure of internal deals. This post explores the valuation perspectives and practical reasons behind this pricing differential, as well as why internal succession remains a compelling strategy despite lower valuations.
In our latest webinar, Matthew R. Crow, CFA, ASA and Brooks K. Hamner, CFA, ASA guide you through the critical steps of succession planning, ensuring your firm’s legacy thrives while maximizing its value. Whether you’re considering a sale, seeking investment, or transacting with current employees, this session is designed to equip RIA owners, acquirers, and industry advisors with the knowledge to make informed decisions and capitalize on emerging opportunities.
For the investment management industry, succession planning is not just a strategic necessity—it’s an important driver of firm value.
As the wealth management industry evolves, with an estimated 40% of RIA founders approaching retirement age, effective succession planning can mean the difference between a thriving firm and a diminished valuation.
Here’s how RIAs can navigate succession to maximize value in 2025 and beyond.
In this week’s post, we take a closer look at how market volatility impacts the valuation of RIAs. Specifically, we show an illustrative example of how it could affect the formula pricing valuation of a $1 billion AUM RIA that has 70% of its clients’ assets in the S&P 500 and 30% in a diversified bond fund. However, for RIAs looking to weather a bear market, we recommend focusing on what you can control, as it should pay off in the long run.
In our latest webinar, Brooks K. Hamner, CFA, ASA and Zachary C. Milam, CFA explore the critical elements shaping RIA valuations in today’s market. They discuss the key factors influencing RIA valuations, the latest industry trends, methodologies for valuing RIAs, and best practices to maximize firm value. We hope you find it informative and helpful.
In motor racing, winning requires building a car with the best combination of speed and handling. There’s a tradeoff between them, as speed requires bigger motors, more structure, and larger tires and brakes, all of which add weight. In the early days of racing, most sports cars focused on either straight-line speed (Ferrari, Corvette) or maneuverability (Porsche, Lotus). Times have changed. Today, winning takes both. And in the RIA space, strong growth and big margins are hallmarks of a winning business.
Last week, Mercer Capital’s investment management team attended Dimensional Fund Advisors’ Deals and Succession conference at Dimensional’s offices in Charlotte, North Carolina. The event focused on the current M&A environment and best practices for internal succession planning and ownership expansion. In this week’s post, we share our five key takeaways from the conference.
A few weeks ago, we had the honor of participating in Alaris Acquisitions’ The Buyer’s Boardroom podcast episode on RIA valuations. In this week’s post, we feature the podcast episode, where Brooks Hamner discusses RIA valuation methods, misconceptions surrounding rule-of thumb measures, key value drivers, and the pros and cons associated with internal versus external sales of your RIA business.
As you can imagine, a lot of prospective clients want to know what the RIA valuation process entails. They’re often taken aback when we tell them it typically takes six to eight weeks from start to finish, but that’s probably because they don’t realize what it all entails if they’ve never had one done. For this week’s post, we’ll channel our inner Nick Saban and focus on the typical valuation process for RIAs.
Goodwill is an intangible asset representing the value of a business beyond its tangible book value. Investment management businesses generally have plenty of value beyond their tangible book value. Therefore, they have lots of goodwill that can be attributed to factors like the firm’s client relationships, the recurring revenue model, brand recognition, or employee expertise. Goodwill and the distinction between personal and enterprise goodwill can have important economic consequences in RIA transactions and disputes. Learn more in this week’s post.
A few months ago, our team attended a business appraisal conference in Portland, Oregon, where we learned about a case involving a “Difficult Partner Discount.” Since we’re often hired when business owners can’t agree on price, we’re well aware of partnership disputes, but are pretty confident we’ve never directly applied a “Difficult Partner Discount” to the value of a business or interest therein. That doesn’t mean that partner disputes and departures can’t significantly impair the value of a company, which we address in this post.
Organic growth is a key metric for the RIA industry, and it’s one that varies widely across firms. As such, it’s a key differentiator between firms, and it’s also an impactful assumption in determining a firm’s value. In this week’s post we explore organic growth trends in the industry and the impact of organic growth on valuation.
A racecar is an example of something that, as a whole, is greater than the sum of its parts. An RIA is another example. But, breaking down an RIA into constituent functions yields certain understandings that cannot be seen clearly by focusing on the whole. In this post, we think about what can be learned from component analysis of RIA returns.
Read our updated complimentary whitepaper on valuing asset managers. Understanding the value of an asset management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, investment management firms exist in a narrow space between client allocations and the capital markets. They depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the risks and opportunities of a particular investment management firm is fundamental to developing a valuation.
When RIA owners can’t agree on the appropriate price for a shareholder buyout, we’re often jointly retained to value the departing member’s interest in the business pursuant to a buy-sell agreement. Whether we’ve been court-appointed or mutually chosen by the parties to do the project, we’ve done enough of these over the years to learn that the process matters as much as the outcome. In this week’s post we describe the overall valuation process and common issues we’ve experienced surrounding RIA ownership disputes.
For several years, RIA consolidation was fueled by cheap debt, compelling acquisition multiples, and AUM growth underpinned by rising markets. Today, debt isn’t free, acquisition multiples have been bid up, and public markets have become dependent on a very narrow list of equities for growth. Despite headwinds, the P.E. thesis of investing in the RIA space: sticky revenue, low capital intensity, and dependable margins, has survived the pandemic and rough market years like 2022. The missing element was and is the inaccessibility of public market equity to cash out the P.E. investment thesis and to provide replenishment capital to do new deals.
For this week’s post we’re introducing our whitepaper on quality of earnings analysis in the investment management industry. For RIA buyers and sellers, commissioning a QofE report is an essential element of the due diligence process. In essence, a well-executed QofE analysis not only reveals why a firm is profitable but also assesses the likelihood of maintaining and enhancing that profitability after the transaction. This comprehensive approach ensures that both buyers and sellers make well-informed, strategic decisions in the RIA industry.
Before parties to an RIA transaction can close, they must first agree on a price. Narrowing that bid/ask spread is tricky, which is often why negotiations between prospective buyers and sellers fail. Buyers and sellers naturally have different perspectives that lead to different opinions on value: Where a seller sees a strong management team, a buyer sees key person risk. Unsurprisingly, these different perspectives on the same firm lead to varying opinions on value, and the gap can be substantial. Bridging that gap is key to getting a deal done. We address five ways buyers and sellers can bridge a valuation gap.
