A weekly update on issues important to the Investment Management industry
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.
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.
Part I of this series focused on variable or bonus compensation, this week we cover the equity component. If the other forms of compensation are meant to attract (salary) and retain (bonus) qualified talent, RIA equity is intended to align shareholder and employee interests while rewarding long-term contributions to firm growth and value. This structure inherently blends returns to labor (employee comp) with returns on investment (shareholder distributions) by its very design. It is typically the most complicated and misunderstood component of RIA compensation but can be highly effective when implemented correctly.
The selection, implementation, and adaptation of compensation models significantly influence an RIA’s profits and the financial lives of its employees and shareholders. In part 1 of the series, we discuss the role of variable compensation, a critical component of RIA compensation models, in motivating employees and promoting business growth. We show how strategic incentive structures can better align the interests of employees with those of the company, effectively balancing risk and reward while fostering growth and resilience in varying market conditions.
The independent trust industry has been flourishing, despite market turbulence, due to increased demand for trust administration services, the relative resilience of trust company fees, and demographic shifts favoring wealth growth. Companies are adapting to changes in the term structure of interest rates, benefiting from fee structures that provide stability in adverse market conditions, and capitalizing on the expanding pool of high-net-worth individuals. With evolving trust laws, growth opportunities tied to generational wealth transfer, and the importance of effective succession planning, independent trust companies are poised for a promising future in the competitive financial landscape.
The first half of 2023 witnessed a minor decline in wealth management M&A deal volume, but an increase in total transacted AUM and deal size, fueled by a surge in the number of deals with AUM over $1 billion and RIA partnerships with private equity firms. This robust RIA deal activity demonstrates the resilience of the sector in contrast to a significant decrease in overall M&A transaction value across all industries. As RIAs continue to offer a growth strategy for strategic buyers and investors, it is imperative for sellers to identify their motivations, the type of partner they seek, and align their goals with the buyer’s strategy to ensure post-transaction satisfaction.
The second quarter of 2023 saw share prices for asset and wealth management firms reflect the broader market’s growth, particularly following the S&P 500’s transition into a bull market in June. However, smaller asset managers underperformed compared to their larger counterparts and the S&P 500, while earnings multiples for publicly traded RIAs saw an 8.8% increase due to a favorable interest rate environment and higher AUM balances. The upcoming report on Q2 M&A activity is set to provide further insight into these trends, and while comparisons with closely held RIAs require caution, focusing on core business practices can offer protection from market volatility.
This week’s post discusses the importance of regularly reviewing and understanding the terms of buy-sell agreements for RIAs, as these agreements can often become sources of contention when unexpected events occur. We highlight issues related to determining the transaction price during a buy-sell event, with scenarios such as fixed-price and formula pricing causing potential misunderstandings or disputes. We also offer advice on avoiding such conflicts, such as getting your RIA valued regularly to manage expectations and drafting fair pricing mechanisms, urging owners to familiarize themselves thoroughly with their buy-sell agreements.
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.
While closing a deal is an important milestone, it’s not the end of the process. After the ink dries on the purchase agreement, there’s a host of issues that the acquiror must address regarding the integration of and accounting for the acquired firm. In this blog post, we address one such post-transaction accounting issue. After a transaction, acquirers are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. This post explores the purchase price allocation process as it relates to acquisitions of assets and wealth management firms, highlighting the valuation considerations surrounding intangible assets like customer relationships, tradename, non-competition agreements, and the assembled workforce.
