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Which type of AUM is worth more to a buyer?

Assets farmed out to money managers are generally more valuable than purely discretionary assets under management

Author Guest Columnist Jack Waymire November 19, 2012 at 5:14 AM
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Jack Waymire: Non-discretionary advisory assets have high retention rates because advisors have lower levels of accountability.


Elmer Rich III

Elmer Rich III

November 20, 2012 — 5:06 PM

This is an increasingly important topic.

M&A is turning out to be one of our core areas. Valuation is a critical challenge and done poorly in most caes.

Part of the problem is that ours is a new industry, the excess and cratering of values over the last decade, lack of detailed operational and industry experience in acquirers and valuations professional,s etc.. Also, once a negotiation starts neither party is rewarded for an accurate valuation so deal pressures take over.

A fair valuation, for both sides, however is critical to a successful transition and ALL parties maximizing their returns from the business. If a seller is paid too much it starves the on-going business of needed capital. If the buyer pays too little is disincentives and can lead to underinvestment in their new asset.

Mis-valuations can threaten and distort any transition and acquisition. Perhaps, why so many fail.

We now do valuations for our seller clients or insist they be done by someone familiar with the industry – which is tough to find.

Key areas that are missed in valuations are:

1- Growth potential: All buyers need growth to get an ROI. Growth factors and potential is typically skimmed over

2 – Distribution, Market Share and “Points fo Sale” – Established, strong sales/distribution relationships, partnerships and networks of referral relationships is probably the most valuable asset of any firm since it is the basis for growth. These are very expensive to build and grow organically. Research says buying growth is the best strategy.

But typically the hard, and easy to count, assets of a firm are given priority. This is due to accounting conventions.

Kudos to RizBiz for taking on this and other M&A topics.

Bill Winterberg

Bill Winterberg

November 20, 2012 — 8:11 PM

Has anyone weighted AUM by age?

Which firm is worth more: one with $500 million AUM and an average client age of 68, or one with $500 million AUM and an average client age of 52?

Brooke Southall

Brooke Southall

November 20, 2012 — 8:20 PM

Always with the challenging questions, Bill!

I’ll see if I can get Jack to weigh in.


Elmer Rich III

Elmer Rich III

November 20, 2012 — 9:29 PM

How would the variable of age of holder be relevant? Assets don’t die.

While family, inheritance and lifestyle factors do occur there is:

1) No data supporting different scenarios – maybe there is dispersion maybe consolidation. We don’t have any data to even make an educated guess.

2) It would be hard to adopt one scenario over another with out facts

Our experience is that the main asset of all RIAs are the closely held businesses of their clients. These relationships are often worth little before any liquidity event, entrepreneurs typically have few investable assets, but significant amounts after. Since all business owners are living a lot longer these liquidity events are critical for everyone.

We actually have a project addressing this called ESOP Solutions which allows advisors to not lose those assets. If advisors loose the business, family, key employee assets and relationships when a client business is sold — they are in trouble.

Most Wall Street firms also have predatory programs to go after every RIA’s clients with closely-held businesses. Beware.

Bill Winterberg

Bill Winterberg

November 20, 2012 — 9:51 PM


It’s a matter of accumulation vs. “decumulation.”

Are clients who add assets worth more than those who are spending them? I’m curious if there is a noticeable difference in valuation with respect to a firm’s average client age.

As I’ve seen you indite before, “show us the data.”

Elmer Rich III

Elmer Rich III

November 20, 2012 — 11:14 PM

Interesting when a call for evidence is characterized as “indite” – but that a normal human defensive response.

How would any prediction of future behavior of a client occur? Circumstances change. Even clients have no way to predict. In caes like this having a large sample size can help but few RIAs have that.

Let’s introduce the idea of principal based “stewardship.” This seems the ideal that an RIA business strives for. This is a much better idea than “fiduciary” which is really and institutional, legal idea.

RIAs seek stewardship of all aspects of their business – based on sound business, ethical and other principals.

Part of being a good steward requires making decisions not based on self-interest, opinions, preferences, hunches, etc. alone – but also on rules of logic, business probity and evidence/data.

Valuation based on age of asset holders may be productive to good stewardship and financial results. That is an empirical question that can be explored and tested a variety of ways.

We see nothing approaching this in our work. Which doesn’t mean it wouldn’t be useful.

Bll Winterberg

Bll Winterberg

November 20, 2012 — 11:36 PM


Indite is a synonym for write. Nothing more. Sorry you felt it was defensive. Next time I’ll insert “write.”

Brian Foster

Brian Foster

November 22, 2012 — 7:47 AM

Interesting article and comments.

I agree with Bill’s comment about accumulation and decumulation. My UK practice clients are typically at, or post retirement. I charge flat retainer fees for financial planning advice and services, which are increased in line with inflation, supported by a client value proposition.

Whilst I get the desire by firms for an AUM model, there are potential conflicts of interest in having to retain the assets which could lead to compromised advice. In effect, I don’t care how much money my client has, just whether they want and need my services, are right for my business and are prepared to pay my fees. Interestingly, this approach appeals to people with greater wealth, and I am free to recommend whatever strategy suits the client, especially under decumulation phases, such as annuity purchase, estate planning and gifting and delivery of retirement income strategies.

Why would I want to peg my firm’s revenue to a potentially reducing asset base? To be honest, it was always something of an experiment, driven by my beliefs around managing conflicts of interest and being truly independent. The FSA’s Retail Distribution Review in the UK seems to be playing into my hands as transparency of cost and value come to the front of the agenda.

My question is, what does this mean for the business valuation do you think, and will this become a more accepted model?

Surely, a business valuation has more to do with the quality of the revenue stream than an arbitary amount of capital under advisement?

Elmer Rich III

Elmer Rich III

November 22, 2012 — 5:47 PM

A business valuation is a simple equation with independent variables and the final value a dependent variable. Of course, this varies as the the indie variables change.

So including an accumulation factor would mean inserting a multiple value. However, this multiple or value would need to be based on data and evidence. The broader the sample the better. This seems impractical. How would any sort of effect be modeled? Then there are always individual differences. It is a fool’s game to predict the future.

It’s very hard to imagine wealthy clients who do not demand full fee and expense information – in any country.

One problem with many of these models is letting he client decide the services. It’s like going to the doctor and only doing what the client wants, can understand or configuring the fees to make the client comfortable – alone.

What is done to sell a client and is successful in sales is usually not successful in on-going professional services. If the client, or patient, knew what was best for them, what was best to pay, how to solve their problems — they wouldn’t need professionals.

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Top Executive: Jack Waymire

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