A weekly update on issues important to the Investment Management industry
It’s hard to see the advent of SchwabiTrade as a good thing for the RIA community – especially the wealth management community. If Schwab is looking to recapture margins from zero commission trading and low rates on sweep accounts, it need look no further than the ten thousand plus RIAs now in its eco-system.
RIA M&A has been a well-publicized topic in the industry. There was a record level of RIA M&A in 2018, and so far in 2019 there are no signs that deal pace is slowing down. Against this backdrop, a new study conducted by Advisor Growth Strategies (AGS) and sponsored by BlackRock provides some insight into the state of deal terms in the RIA M&A market from the perspective of both buyers and sellers. We’ve highlighted some of the key takeaways from the study in this week’s post.
During Q3 2019, most classes of RIA stocks underperformed major equity markets, which are having their best year, so far at least, in more than two decades. In general, base fees for RIAs were up due to higher average AUM (driven by market growth), however, each sector experienced unique challenges. As we do every quarter, we take a look at some of the earnings commentary from investment management pacesetters to scope out the dominate trends.
Through the first three quarters of 2019, asset and wealth manager M&A has kept up with 2018, the busiest year for sector M&A during the last decade. Transaction activity is poised to continue at a rapid pace as business fundamentals and consolidation pressures continue to drive deal activity. Several trends which have driven the uptick in sector M&A in recent years have continued into 2019, including increasing activity by RIA aggregators and mounting cost pressures.
Earlier this month we had the pleasure of participating in a panel discussion on the value of wealth management firms in a transaction setting for the CFA Society of New York. In conversation after the event, one of the audience members asked me what I thought was the most successful business model to follow in the wealth management space. It’s a question we hear fairly often, and I try to avoid punting on the answer and saying “it depends.” In reality, though, it does depend.
The asset and wealth management industry is facing numerous headwinds, chief among them being ongoing pressure for lower fees. Traditional asset and wealth managers feel this pressure acutely, which has likely contributed to their relative underperformance over the last quarter. Alt managers, which have been the sector’s sole bright spot during this time, are more insulated from fee pressure due to the lack of passive alternatives to drive fees down. These headwinds have contributed to a decline in EBITDA multiples for traditional asset/wealth managers, which in turn has resulted in lackluster stock price performance.
In May of this year, assets in passively managed funds equaled assets actively managed for the first time in history. As investors seek low-cost solutions, alternative managers are working to solidify their place in investors’ portfolios. Despite the headwinds the asset management industry faces, most investors still value the diversification offered by alternative assets, particularly late in the economic cycle. In this post, we take a closer look at how alternative asset managers are performing in light of the broader shift from active to passive management and increased fee pressure.
Continuing with our succession series, this week’s focus is on internal transitions. If you’ve ever wondered why there aren’t more transactions in the RIA space, it’s largely because most of these businesses ultimately transition their ownership internally to younger partners at the firm. These deals typically don’t get reported, so you probably don’t hear about most of them. Still, it’s the most common type of transaction for investment management firms and probably something that’s crossed your mind if you’re approaching retirement.
Succession is as often discussed as it is misunderstood. While many practice management issues revolve around industry expectations, regulations, client expectations, and basic economics, succession involves all of those things plus personality, culture, and skill sets. And while much has been written about succession in the RIA industry, we’ve seen plenty of topics get little, if any attention. This post is dedicated to some of the latter.
As we explained in a recent post, there are many viable exit options for RIA principals when it comes to succession planning. In this post, we will review some of the considerations when partnering with an RIA consolidator.
