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RIA Valuation Insights

A weekly update on issues important to the Investment Management industry

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Q1 2019 Asset Manager M&A Trends

On the Heels of a Record Year, Will Asset Manager M&A Trends Continue to be Strong in 2019?

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 rising cost pressures.  Total deal count during the first quarter of 2019 was flat compared to the same period in 2018, while deal count was up 35% for the twelve months ending March 31, 2019, compared to the comparative period ending March 31, 2018.  Reported deal value during the first quarter of 2019 was down significantly, although the quarterly data tends to be lumpy and many deals have undisclosed pricing. 

Asset Management

Valuations of Asset Managers Are Slow to Recover

Is the Decline in Active Management a Result of Increased Competition or Mediocre Performance?

While market declines are a threat to the profitability and valuations of any asset management firm, active managers face the additional threat of relative underperformance driving outflows, even in periods of rising markets. Low fee passive strategies have become increasingly popular due in part to both the perceived underperformance of active managers and an increasing focus on fees. But to what extent have active fund outflows been driven by mediocre performance versus competition from passive strategies, and what is the impact on asset management firm valuations?

Wealth Management

2019 CFA Institute Wealth Management Conference Recap

Last week, Matt Crow, Brooks Hamner, Taryn Burgess, and Zach Milam attended the 2019 CFA Institute Wealth Management Conference in Fort Lauderdale.  We didn’t get a total headcount, but attendance appeared to be up from last year’s event.  There are probably a number of explanations for this, but perhaps the most plausible was the interest in this year’s focus on the psychological side of wealth management, which explored behavioral finance tendencies and how emotional decision-making can impact investment performance.  For this post, we’ve elected to summarize some of these presentations and their implications for financial advisors.

Practice Management

Buy-Sell Agreements for Investment Management Firms

An Ounce of Prevention is Worth a Pound of Cure

As difficult it is to imagine a valuable car such as the Ferrari 250GT SWB being forgotten, what we see more commonly are forgotten buy-sell agreements, collecting dust in desk drawers. Unfortunately, these contracts often turn into liabilities, instead of assets, once they are exhumed, as the words on the page frequently commit the signatories to obligations long forgotten. So we encourage our clients to review their buy-sell agreements regularly, and have compiled some of our observations about how to do so in the whitepaper. We hope this will be helpful to you.

Wealth Management

Whitepaper Release: How to Value a Wealth Management Firm

Investment management is a younger profession than many, but it too has evolved and is evolving, into an industry of sub-specialties of manufacturing (asset management) and distribution (wealth management).  Wealth management is in a dynamic period, with changing client service models, challenges to profitability, the augmentation and distraction of technology, consolidation in some ways and fragmentation in others.

Recognizing this, we thought it would be useful to put together a whitepaper on valuation issues that are unique to the wealth management industry.  While there are certainly characteristics of wealth management firms that are common to all RIAs, there are enough distinctions to caution anyone from painting the profession with too broad a brush.

Wealth Management

What Wealth Managers Need to Know About the Market Approach

The market approach is a general way of determining the value of a business which utilizes observed market multiples applied to the subject company’s performance metrics to determine an indication of value.  The “market” in market approach can refer to either public or private markets, and in some cases the market for the subject company’s own stock if there have been prior arms’ length transactions.  The idea behind the market approach is simple: similar assets should trade at similar multiples (the caveat being that determining what is similar is often not so simple).  The market approach is often informative when determining the value of a wealth management firm.

Wealth Management

What Wealth Managers Need to Know About the Income Approach

There are three general approaches to determining the value of a business: the asset-based approach, the income approach, and the market approach.  The three approaches refer to different bases upon which value may be measured, each of which may be relevant to determining the final value.  Ultimately, the concluded valuation will reflect consideration of one or more of these approaches (and perhaps several underlying methods) based on those most indicative of value for the subject interest. This week, we take a look at how the income approach is used to value wealth management firms.

Wealth Management

The Anatomy of a Wealth Management Firm

A Closer Look at a Business that Continues to Pivot with Client Needs

Wealth management firms have significantly evolved over the last several decades for various reasons. For purposes of this post, we provide a bit of history on the industry, basic characteristics of today’s wealth management firm, and take a look at recent performance.

Current Events

Warren Buffett and the Intrinsic Value of Investment Management

A Few Reflections on the 2019 Berkshire Hathaway Shareholder Letter

In a world where non-stop financial commentary is as commonplace as it is tedious, one man’s market insights get an unusual amount of attention: Warren Buffett’s annual shareholder letter.   Buffett is an ironic icon of the investment management industry.  He’s made his fortune from active investment management, but regularly articulates his skepticism of the same.  He’s doubtlessly inspired more people to found RIAs than any other individual, yet his firm, Berkshire Hathaway, is not an RIA.  And his annual treatise on the performance of his company is full of common-sense wisdom that, based on Berkshire’s track record, is anything but common.

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Key Contacts

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Matthew R. Crow, CFA, ASA

(901) 685-2120

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Brooks K. Hamner, CFA, ASA

(901) 322-9714

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Zachary W. Milam, CFA

(901) 322-9705

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Jeff Capwell, CPA

(901) 322-9759

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Koby Allen

(901) 322-9737

Investment Management

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