RIA Valuation Insights

March 22, 2024 Practice Management

An Ontological Approach to Investment Management

Review of “Winning at Active Management” by William W. Priest et al.

“Winning at Active Management” by Bill Priest is an important book for managing a successful investment management practice. Emphasizing the importance of corporate culture, Priest argues against traditional command-and-control structures, highlighting that knowledge-based businesses like investment management thrive on intellectual contributions from all levels of the organization. The book provides a fresh perspective on the role of culture in mergers and acquisitions within the investment management sector, preaching that cultural compatibility is crucial for the success of such transactions.

March 13, 2024 Margins and Compensation

How EBITDA Margins Affect Revenue Multiples

Whenever someone asks us what their RIA is worth as a multiple of revenue, we respond by asking about their firm’s EBITDA margin. This week’s blog post explores how RIAs can enhance their value by focusing on EBITDA margin, revealing the pivotal role of profitability in investor attractiveness. It also provides strategic insights for balancing growth and profitability.

March 8, 2024 Practice Management Wealth Management

Employee Alignment Is Essential in Wealth Management

Employee alignment is crucial in asset and wealth management due to the industry’s reliance on human capital. Creating alignment between employees and shareholders is essential for the growth and success of these firms, particularly for firms with non-employee ownership. Effective compensation models and incentive programs can align interests, supporting the long-term growth and success of the enterprise.

March 1, 2024 Practice Management

Capital Budgeting for Team Building

Tools for Long-Term Greedy Practice Management

The recent cancellation of Apple’s decade-long “Apple Car” project underscores the opportunities that capital budgeting offers for strategic decision making. Capital budgeting is a modeling exercise that has applications in the RIA community as well, where resource allocation decisions are more likely to involve human capital as opposed to equipment. This week, we explore the concept of returns to labor versus returns to capital in investment management, illustrating how long-term strategic thinking about human capital can lead to significant returns using the same tools integral to decision making at industrial concerns.

February 22, 2024 Current Events

Will RIAs Be Subject to Anti-Money Laundering Rules?

The Financial Crimes Enforcement Network (FinCEN) is proposing a rule that would require investment advisors to comply with Bank Secrecy Act requirements, including implementing anti-money laundering controls and filing suspicious activity reports. Unlike previous attempts, this proposal does not hold investment advisors accountable for identifying their clients, but FinCEN is considering a separate proposal with the SEC for future customer ID requirements. With an increased push from regulators and illicit actors’ growing utilization of RIA intermediaries for AML purposes, the investment advisory sector may soon face stricter regulations, particularly regarding customer identification.

February 16, 2024 Transactions

Reconciling Real-World RIA Transactions with Fair Market Value

When RIA owners think about their firm’s value, they frequently think in terms of the dollar value they believe they could sell the business for in an arm’s-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. The details of transaction pricing—things like contingent consideration structures and thresholds— rarely make it into the trade press or RIA rumor mill, adding to the confusion. In this blog post, we explore various transaction structures employed in the industry and their relationship to fair market value.

February 9, 2024 Transactions

RIA M&A: What Can Possibly Go Wrong?

A Very Incomplete List of What Not to Do in Transactions

In the RIA community, nothing gets people’s blood flowing like a transaction. Big mergers are fantastic, but even deals involving a few hundred million of AUM are widely reported. For all the hype, making M&A successful requires minding Ps and Qs, and is as much, if not more, about attention to detail and being realistic as it is about sweeping vision and uplifting pronouncements.

February 2, 2024 Industry Trends Wealth Management

Will Finfluencers Replace Financial Advisors?

The CFA Institute Research & Policy Center’s recent report reveals the significant influence of financial influencers (finfluencers) on the investment decisions of Gen-Z, underscoring the urgent need for the wealth management industry to adapt to the digital age. Highlighting a concerning gap, the report notes that a substantial portion of finfluencer content lacks necessary disclosures, potentially leading young investors to make decisions based on biased information.

Despite the challenges posed by finfluencers, the report suggests they offer a unique opportunity for RIAs to engage with the next generation of investors, advocating for strategic partnerships complemented by rigorous compliance and transparency measures. Read the details in this week’s post.

January 26, 2024 Current Events Industry Trends Transactions

Quality of Earnings Analysis for RIAs

The M&A space in the RIA sector has seen a marked increase in transaction activity over the past ten years, along with advancements in its supporting infrastructure. Professionalization of the buyer market has led to a more detailed examination of target companies’ earnings. Mercer Capital’s whitepaper highlights the importance of Quality of Earnings (QofE) analysis in presenting a more accurate picture of a company’s earnings and cash flows for both potential buyers and sellers.

January 19, 2024 Current Events Industry Trends

Navigating the Shifting Tides

Trends Shaping the RIA Industry in 2023 and Beyond

In 2023, the RIA industry witnessed growth and rebounded from the previous year’s slump, despite earlier concerns about inflation and high interest rates. This growth occurred alongside a shift in the financial landscape, where public firms in wealth management underperformed compared to the broader market and alternative asset managers. Additionally, RIAs have found the importance of data use, with many advisors using data to enhance portfolio decisions, operational efficiencies, and client relationships.