RIA Valuation Insights

March 14, 2016 Margins and Compensation

What is Normal Compensation at an Asset Management Firm?

Part 2

Investment management is a talent business, and that talent commands a substantial portion of firm revenue which often exceeds the allocation to equity holders. While there is no perfect answer as to what an individual or group of individuals should be compensated in an RIA, we can look to market data and compensation analysis, measured against the particular characteristics of a given investment management firm’s business model, to make reasonable assumptions about what compensation is appropriate and, by extension, what level of profitability can be expected.

March 7, 2016 Margins and Compensation

RIA Compensation and Valuation: A Conundrum of Brobdingnagian Proportions

Part 1

A tradeoff in an investment management firm’s business model is that of compensation expense versus profit margin. Compensation is almost always the largest expense on an RIA’s income statement and, of course, has a direct impact on net income. In light of that, we consider two business models and the effect on value.

February 29, 2016 Practice Management Transactions

Success and Succession Offers Targeted and Often Unexpected Insights on Internal Ownership Transition at RIAs

As the Baby Boomer generation continues to age toward retirement, many “founder-centric” asset management firms face the prospect of internal succession. The recent book “Success and Succession,” by David W. Bianchi, Eric Hehman, Jay Hummel, and Tim Kochis, is written from the perspective of three individuals who have experienced successful ownership transitions. The book provides some interesting insights into the logistical, financial, and emotional process that internal succession entails through colorful accounts of past triumphs and train wrecks.

February 22, 2016 Current Events

Earnings Calls 4Q15

Year-end 2015 closed out a quarter of elevated market volatility and falling asset prices in the traditional asset management industry. The year was marked by a rising flight to passive strategies and overall falling net inflows that pressured margins, causing many managers to take a hard look at their expenses and compensation structures going into 2016. Looking ahead, traditional asset managers are also facing headwinds from a slowdown in the global market, and a subdued (but cautiously optimistic) outlook at home. As we did last quarter, we take a look at pacemakers in the traditional asset management industry and outline four key themes we believe are expected to define 2016.

February 15, 2016 Industry Trends

What’s Stopping Banks from Getting into Wealth Management and How to Overcome It

Final Thoughts on AOBA

Much like Porsche discovered fifty years ago, many banks are responding to regulatory changes by opting for a hybrid model that pairs trust and wealth management operations with traditional banking. The advantages of banks developing their investment management operations are pretty easy to see: it produces a more stable and diverse revenue stream, it provides more touch points for customer relationships, and it can substantially improve a bank’s return on equity.

Of course, opportunity is a two way street, and banks looking to venture into investment management, especially by acquisition, typically encounter a couple of major obstacles: balance sheet dilution and culture clash. Both of these challenges arise from the main difference between traditional banking and asset management. Whereas banking is asset heavy and personnel light, asset management requires not much of a balance sheet, but plenty of expensive staffing. It’s a significant difference that can only be managed head on.

February 8, 2016 Industry Trends

Can Getting into Wealth Management Save Community Banking?

An AOBA Conference Followup

Last week, Brooks Hamner and I spoke at Bank Director’s Acquire or Be Acquired Conference in Scottsdale about how banks can build value through their trust and wealth management businesses. Our session got a great response, probably because we were some of the only speakers offering the banking community some hope. How then do you ensure that a trust not become an earnings-dilutive cauldron of liability?

February 1, 2016 Industry Trends

How Banks Build Value via Trust and Wealth Management Franchises

In this post, we have included the slide-deck from our presentation, “Valuing a Trust & Wealth Management Franchise” from Bank Director’s 2016 Acquire or Be Acquired conference. Even with the present market instability, banks have an interesting opportunity to expand their financial services while diversifying their revenue streams with asset management. We sense some growing demand for sophisticated trust services, and a lot of RIAs in the wealth management space see banks with existing trust departments as a complementary environment to sell into.

January 25, 2016 Practice Management

Five Things to Improve the Value of Your Investment Management Practice

Which Have Nothing to Do with the Stock Market

This post provides some brief thoughts about five topics, posed as questions, that can make or break the value of RIAs. These topics have longer term and more strategic implications than the day-to-day fluctuations in capital markets, and while equity research may be more fun, these are more reliably lucrative.

January 18, 2016 Current Events

Are You GIPS-Compliant?

The Global Investment Performance Standards (GIPS®) were adopted by the CFA Institute in 1999 and are widely accepted among the international investment management industry. GIPS are a set of ethical principles based on a standardized, industry-wide approach that apply to investment management firms and are intended to serve prospective and existing clients of investment firms. While compliance by investment firms is voluntary, many investors consider GIPS compliance to be a requirement for doing business with an investment manager. Alternative managers have lagged behind the industry in claiming compliance with GIPS, but changes in the industry suggest GIPS compliance is becomingly increasingly important.

January 11, 2016 Industry Trends Transactions

Asset Manager Dealmaking Up in 2015 on Lower Volume

Despite the recent uptick, we believe the backlog of available deals remains fairly robust given the four year pause in transactions from 2009 to 2013 and the aging demographics of many investment management firms. The real threat to deal making would be a longer, more pronounced downturn or continued volatility in the equity markets that would crater AUM levels and investor confidence.