RIA Valuation Insights Q3 2019 Call Reports
Differentiated Strategies of Asset Managers, Wealth Managers, and RIA Consolidators
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.
Theme 1: Asset managers are responding to fee pressure either through acquisitions to achieve scale or by outsourcing administrative tasks to reduce overhead.
- I’ve been in the investment business well over 30 years and there’s never been a time when fee rates have been going up. How you grow and how you achieve attractive margins in this business tends to be based on scale, the ability to offset reductions in fee rates tied to per dollar of assets by growing the base of assets you manage and leveraging the spending in support of that asset management. […] We expect continued modest declines in our average fee rates. – Tom Faust, Chairman & Chief Executive Officer at Eaton Vance
- We recognize the pressure that the industry is under, and it is very top of mind with all the senior management to look [at] every kind of saving that we can generate to continue to invest in the parts that we think are going to be incremental to getting inflows and in a few years. – Matthew Nicholls, Executive Vice President Chief Financial Officer at Franklin Resources
- Mergers are more immediately accretive because of consolidation benefits. There are many transactions, you have all the obvious consolidation benefits that you would expect, which is office consolidations overhead maybe cross sell, pricing changes or other things here that you would see in a merger, but you wouldn’t see in a holding company transaction. – Ruediger Adolf, Founder, Chief Executive Officer and Chairman at Focus Financial
- We always thought there’d be opportunity to save more than $475 million. By the time of the [Invesco – Oppenheimer] transaction closing we only had a clear line of sight regarding the $475 million of savings. After we closed the deal we were able to look deeper into the business and we started making significant progress on the integration. And we now see that we can run the business with this lower expense base. – Loren Starr, Chief Financial Officer at Invesco
- Leveraging our scale can also take different forms. In certain areas delivering partnerships with industry leading service providers through our affiliates can be more efficient and provide better outcomes, particularly where AMG’s scale can improve pricing, access and service. For example, we’ve recently partnered with ACA Compliance Group to support affiliates seeking to lower their compliance cost and access a greater breadth of services. – Jay C. Horgen, President and Chief Executive Officer at Affiliated Managers Group
Theme 2: Wealth Managers, who are generally more resilient to fee compression, are growing the bottom line by increasing headcount rather than cutting costs.
- There’s no question the resiliency of the overall fees for wealth management has been — is pretty inelastic so far. We are starting to see some of the e-brokers charge much lower fees than the traditional wealth management platforms in terms of the overall advisory fee. But unquestionably when commissions are free, the investor is going to have to make a choice. Is […] the value proposition of having that advice worthwhile versus having a commission free relationship? And every client is going to have to make that assertion. – Laurence D Fink, Chairman and Chief Executive Officer at BlackRock
- We’ve been staffing up our recruiting department over the last few months and the pipeline has been building. With regard to the advisors that we’re focusing on […] the higher performing or higher producing type advisors that are more in line and more consistent with our current average productivity of advisors. […] So, we’re continuing to see that expand as we move into 2020 and intend on hitting an inflection point from a growth perspective as we continue to progress forward as the pipeline continues to grow. – Shawn M. Mihal, Senior Vice President, Wealth Management at Waddell and Reed
Theme 3: Consolidators attempt to ease investor concerns over their debt burden in the wake of a potential market correction.
- At the same time we continue to maintain a prudent level of leverage and have repositioned our balance sheet over the last several quarters extending duration while maintaining flexibility and capacity to capitalize on growth opportunities even in challenging markets. – Thomas M. Wojcik, Chief Financial Officer at Affiliated Managers Group
- We are looking at our capital management policy really to align with our overall strategy. We want to create flexibility and right now, our priorities are to delever. About 90% of our free cash flow has gone and probably will go toward delevering. We do have a small buyback program. We do have a small dividend program. We view these as ancillary parts to our strategy. We look at the buyback as a way to manage shares — outstanding shares. So, we are going to focus on delevering. – David C. Brown, Chairman and Chief Executive Officer at Victory
- Assuming constant markets, we anticipate that our net leverage ratio will remain essentially unchanged at 4.3 times from Q3 to Q4. We intend to delever gradually, starting in 2020 as we execute against this solid pipeline and satisfy earn outs associated with the transactions we have closed in the past, and plan to operate with a net leverage ratio between 3.5 and 4.5 times. We are comfortable that this range gives us the flexibility to pursue larger strategic transactions while also accelerating the growth of our existing partner firms in Focus and investing to drive organic growth. […] Please see [the earnings supplement] which provides a sensitivity analysis on the net leverage ratio impact of a material equity market correction. We will continue to manage our capital resources carefully while maintaining sufficient flexibility to invest in the growth of our business. – Ruediger Adolf, Founder, Chief Executive Officer and Chairman at Focus Financial
Earnings calls this quarter brought to light the varying challenges and opportunities that different RIAs face.
The shift from active to passive investing has forever changed the active asset management industry and asset managers are having to re-think their cost structure in order to stay competitive. Increasing operating leverage through acquisitions and outsourcing has allowed asset managers to protect their margins despite declining fees. Wealth managers are taking a different approach to increase cash flow. The wealth management industry, which depends on the advisor-client relationship, is staffing up as additional advisors can mean additional sales. Meanwhile, consolidators like Focus Financial, AMG, and Victory Capital are providing solutions to both asset managers, who hope to achieve scale, and wealth managers, who look to expand their reach.
