RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

Category

Wealth Management


Current Events Industry Trends

Market Indications of RIA Value are Mixed, To Say the Least

Unicorn or Glue Horse?

The differential in interest in public investment management businesses and private investment management businesses isn’t sustainable. Will higher interest rates eventually wear down leveraged acquirers, as they have in other growth-and-income sectors? Will PE investors start to question the merits of trading companies from fund to fund instead of testing valuations in the open market? Will the public RIA group follow Pzena’s lead and go private? Or will public investors’ newfound interest in dividend stocks lead them to RIAs? It’s tough to forecast a public RIA resurgence but never say never.

Asset Management Transactions

Reconciling Real-World Transactions With the Fair Market Value Standard

When business owners think about the value of their firm, they frequently think in terms of the dollar value that they believe they could sell the business for in an arms’ length transaction. However, the nuances of real world transaction terms in the investment management industry can often obscure what’s being paid for the business on a cash-equivalent basis. In this blog post, we explore various transaction structures employed in the industry and their relationship to fair market value.

Practice 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.

Investment Management Confronts Stagflation and More

Malaise, Anyone?

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.

Industry Trends

RIA M&A Q1 2022 Transaction Update

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.

Industry Trends

Wealth Management Trend Lines May Be Rolling Over

After a Great Year, Higher Rates and Weaker Markets Threaten Continued Growth

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.

Purchase Price Allocations for Asset and Wealth Manager Transactions

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.

Practice 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.

Practice 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.

Practice 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.

Industry Trends

Buy-Sell Agreement Basics for Wealth Managers

The Importance of Buy-Sell Agreements for Wealth Management Firms, and Why It Might Be Time To Revisit Yours

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.

Asset Management Current Events

RIA M&A Q4 Transaction Update

Aggregators Continue to Drive Deal Volume in 2021

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.

Current Events

RIA M&A Q3 Transaction Update

RIA M&A Activity Continues to Reach Record Highs

Despite the dip in the second quarter of 2021, RIA M&A activity continues to reach record highs putting the sector on track for its ninth consecutive year of record annual deal volume.

As we discussed last quarter, the same three demand drivers were persistent throughout the third quarter. While fee pressure in the asset management space and a lack of succession planning by many wealth managers continues to drive consolidation, looming proposals to increase the capital gains tax rate has accelerated some M&A activity in the short-term as sellers seek to realize gains at current rates.

Increased funding availability in the space has further propelled deal activity as acquisitions by consolidators and direct private equity investments increased significantly as a percentage of total deals during the recent quarter. What does this mean for your RIA firm? Read this post to find out.

Asset Management Industry Trends

Asset / Wealth Management Stocks See Mixed Performance During Third Quarter

After a Strong Summer, Public Asset Managers See Stock Prices Dip as Market Pulls Back in September

RIA stocks saw mixed performance during the third quarter amidst volatile performance in the broader market. In September, the S&P 500 had its worst month since March 2020, and many publicly traded asset and wealth management stocks followed suit.

In this week’s post, we illustrate what this means for your RIA and give a prediction on the outlook of the RIA industry.

Current Events

Growing Pains

Is the RIA Industry in Growth Mode or Shake-Out?

While the wealth management industry is not new, the amount of change, churn, and growth that has occurred in the industry over the past ten years make it easy to forget how far the RIA industry has come since the heyday of broker-dealers. Contextualizing the challenges facing the wealth management industry leaves one to wonder if many of these trends are no more than growing pains in the sector’s life cycle. And if so, what might such analysis suggest about the prospects for the fiduciary model?

Current Events

RIA M&A Q2 Market Update

Whispered Numbers Shout

RIA MIA activity slowed somewhat in the second quarter of Q2, but RIA markets are still on track to record the highest annual deal volume on record. As we discussed last quarter, fee pressure in the asset management space and a lack of succession planning by many wealth managers are still driving consolidation. But the increased availability of funding in the space, in tandem with more lenient financing terms, has also caused some of this uptick. But could some of this activity be attributable to the RIA rumor mill and the hype of double-digit multiples in the space?

Asset Management

Asset / Wealth Management Stocks See Another Quarter of Strong Market Performance

Publicly Traded Asset / Wealth Managers See Continued Momentum Through Second Quarter as Market Backdrop Improves

On balance, the outlook for RIAs has generally improved with market conditions over the last several months. AUM has risen with the market over this time, and it’s likely that industry-wide revenue and earnings have as well. With markets near all time highs, most RIAs are well positioned for strong financial performance in the back half of the year. This week’s post details the past performance and outlook for traditional asset and wealth managers, alternative asset managers, as well as aggregators and multi-boutiques.

Transactions

Fairness Opinions

Evaluating a Buyer's Shares From the Seller's Perspective

Stock consideration is rarely discussed in RIA transactions, but it is a common financing feature in other industries. We expect to see more stock for stock deals in RIAs for two reasons. As public investment management firm multiples continue to push higher, buyers will be tempted to take advantage of multiple-arbitrage in certain situations. And if capital gains tax rates rise and sellers can use rollover equity to defer gains, the structure will become more attractive to sellers. How can a seller decide whether or not to accept a suitor’s stock? Jeff Davis has a few thoughts.

Practice 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.

Transactions

Purchase Price Allocations for Asset and Wealth Manager Transactions

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 and diversified financial services companies, and private equity. These acquirors 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. In this post, we describe what a purchase price allocation is and discuss the common intangible assets acquired in the purchase of private asset and wealth management firms – existing customer relationships, tradename, non-competition agreements with executives, and the assembled workforce.

Asset Management Transactions

FAIR … The F-word in RIA M&A: Part I

When Do You Need A Fairness Opinion?

Fair is often the first-four-letter word that most children learn, and it often leads to more arguments than other choice words. Although children eventually learn that life is not always fair, we spend a lot of time ensuring that major economic events are. Transactions are rarely straightforward, and as the pace of M&A activity in the investment management community continues to accelerate, more shareholders are scrutinizing both the pricing and terms of transactions. In this post (and in the next), we explain when you should consider getting a Fairness Opinion and what that involves.

COVID-19 Coverage Transactions

Low Rates and NIM Margins Spur Bank Interest in the Wealth Management Sector

Executives Seek Revenue Streams That Aren’t Tied to Interest Rate Movements

COVID-19 adversely affected sector M&A for a couple of months when most of the U.S. was under shelter at home/safer in place orders. However, deal activity is recovering quickly and now could be further accelerated as banks look to replace lost interest income with fee-based revenue. An increasing number of clients on the banking side of our practice are showing interest in the wealth management space, and it’s easy to understand why. Long-term rates hovering at historic lows have significantly impaired net interest margins, so banks are exploring other income sources to fill the void. Wealth management is a natural place to start since so many banks already offer financial advisory services of one form or another.

Investment Management

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