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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

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

If you are a fee-only or fee-based financial advisor, your key to success is building a critical mass of assets under management. Based on your ability to control assets, you will enjoy an enviable lifestyle during your working years and you will sell your business for two to four times revenue when you retire (Source: IFA Marketplace). That’s eight to 16 times higher than commission businesses that frequently sell for 0.25% of revenue.

The question is, what types of assets maximize your AUM business valuation?

We know assets are a measuring stick, but the number that really matters is the recurring revenue that you generate from the assets. For example, two advisors control $100 million each, but one generates $750,000 of fees and the other $1.5 million of fees. The explanation of the range may be as simple as different fee schedules or it may be the types of services that are provided by the advisors. See: Two advisors debate the financial viability of serving as a fiduciary to small accounts amid DOL’s new rules.

This article focuses on four types of assets that may be included in the AUM calculation.

Most AUM descriptions include the following conditions:

• The services are delivered by RIAs and investment advisor representatives.
• The assets produce continuous fees.
• The investor receives ongoing advice and services for the fees.

The roles of the professionals do not matter. They could be money managers, financial advisors or financial consultants. What matters is meeting the three conditions.

1. Managed assets

The distinguishing characteristics for this type of asset are money managers who are decision-makers and invest client assets in the securities markets. They do not invest in other money managers — financial advisors do that. For example, separately managed accounts, mutual funds, hedge funds, and ETFs are money managers because they invest in the securities markets. See: Fidelity launches major division in Denver with an 'ETF quarterback’ calling the shots.

These assets meet the three AUM requirements.

2. Advisory Assets (discretionary)

There are two types of advisory assets based on the professionals’ willingness to make investment decisions for investors — there are discretionary and non-discretionary advisors.

Discretionary advisors provide information, recommendations and make decisions for clients — just like the money managers. The advisors’ decision-making is based on a Limited Trading Authority that is part of their service agreements. This Authority permits them to make buy/sell decisions for clients without their approval in advance. For example, they make the decision to sell Fund A and buy Fund B. Investors may not find out about the decision until they receive their next monthly statement or quarterly performance report. See: Should I dump my securities licenses?.

These assets meet the three AUM requirements.

3. Advisor assets (non-discretionary)

Non-discretionary advisors provide the same services as the discretionary advisors, but there is no limited trading authority. In this case, advisors make recommendations to clients, but nothing happens until clients make the final decisions. The professional is acting as a true advisor or consultant and does not make any decisions on behalf of clients. See: Three RIA adventures that led to dramatic asset growth.

These assets meet the three AUM requirements.

4. Broker-dealer assets

Broker-dealers and their sales reps would like to include assets that are invested in financial products in their AUM. Four times revenue is a lot better than 0.25%. However, most of their assets do not qualify when we apply the AUM conditions. There are a couple of gray areas that meet some of the conditions. See: A hungry NYC-based firm takes aim at a bigger future by signing on with Dynasty Financial Partners.

First, there are assets that produce level loads (continuous compensation) for the sales representatives. This may meet the definition for continuous fees, but the rep may not be providing any continuous advice or services. Regardless, these are B-D assets and not RIA assets.

The second type is assets that reside in variable annuity contracts. The contracts may have 30 or more investment alternatives and advisors charge a fee (IAR, continuous compensation) to help investors select the right options and monitor their results (continuous services). The regulators are not fond of this sales practice, they call it double dipping, but the assets fit all three of the AUM conditions. See: Not without criticism, TD Ameritrade opens an 'insurance agency’ for RIAs that want to provide annuities.

The first type of asset does not meet the AUM conditions. The second type of asset may meet the conditions, but regulators frown on the combined methods of compensation, unless the products are no-load.

Which assets have the highest valuations?

Assets that have high retention rates should have the highest AUM valuation rates. For example, non-discretionary advisory assets have high retention rates because advisors have lower levels of accountability. Remember, the advisors provide advice, but the investors make the final decisions. For this reason, these assets should have higher valuations.

Based on accountability, discretionary advisory assets should have the second highest valuation. In this case advisors are decision-makers, but they use the services of money managers. When performance expectations are not being met, advisors are in a position to fire underperforming managers and retain client relationships. See: Do 401(k) assets require all fiduciary care all the time?.

Managed assets are the most vulnerable because the managers have the highest degree of accountability for performance. Managers can lose a lot of clients if they underperform in back-to-back years. Therefore, managed assets would have the lowest valuations because they have the lowest retention rates.

Jack Waymire spent 28 years in the financial services industry. For 21 years he was the president of an RIA that provided investment services to more than 50,000 investors. He is the author of “Who’s Watching Your Money?” and the founder of two major financial websites.One, www.InvestorWatchdog.com provides free tools and data to investors who use the services of financial advisors, and Paladin Registry is a compendium of pre-screened, five-star-rated, independent RIAs and IARs. Jack is a columnist for Worth magazine and a contributor to major financial websites, and is frequently quoted by the media.

Mentioned in this article:

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Top Executive: Jack Waymire

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.

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.


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.”

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?

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.

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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