How to Value a Wealth Management Firm?Valuing a wealth management firm requires consideration of several key factors, like any other organization, there are differences in how to approach the valuation of a wealth management firm. Wealth management is incorporated in the large group of companies of financial intermediaries within personal financial services offering different services like investment advisory, strategic planning for private clients and companies, and tax consulting. As the market grows thus requiring the services of wealth management, it has become more relevant to appraise these firms in merger and acquisition and other valuation transactions.
The eBook begins by defining Wealth Management Firms.
In its simplest definition, wealth management refers to a provider of expert financial services to high-income earners. Most of these firms usually hire individuals with extensive experience in financial consulting, investment management as well as other financial specialists to handle client’s wealth. Wealth management firms can be stand alone companies or third party companies or can be a part of any big financial house such as banks or insurance houses.
Importance of Consideration in Valuing a Firm Specializing on Wealth Management
Valuing a wealth management firm requires consideration of several key factors, including:
How to Value a Wealth Management Firm?
Assets Under Management (AUM): The overall amount of business that the firm has under its hat is perhaps one of the strapping considerations while evaluating the reevaluation of the firm. Larger AUM values usually translate to the value of firms since they attract higher management fees more than anything else.
Revenue Streams: Banks as players in wealth management earn their revenues through management fees, commission and interest earned. Such revenue sources are differentiated and stable and affect the value of the firm.
Client Base: Of like importance is the quality and loyalty of the clients of the firm. Compared with the firms with a relatively small amount and less stable client base, the firms serving those high net worth clients are relatively more valuable.
Growth Prospects: The size of the firm, its future prospects in terms of increase in clients and types of services, is also a value driver.
Competition: The intensity of competition within the market could a factor by bringing other competing players such as other wealth management firms or other financial institutions to the company’s equation.
Regulatory Environment: This is the implication that the regulatory environment in which the firm is located has potentialities to influence value since changes in regulations may influence the operations and revenues of the firm.
Management Team: Hence the technical competence, industry experience and track record of the firms management team should also be important to consider because they may strongly influence the firms ability to gain and retain clients.
Valuation Methods
There are several valuation methods that can be used to value a wealth management firm, including:
Asset-Based Valuation: This method of valuation regards the firm by the parameters of its AUM and other tangible revenues and assets.
Income-Based Valuation: The Income Statement method evaluates the worth or worth of the firm with reference to its sales and earnings.
Market-Based Valuation: This method ascribes value to specific assets of the firm such as a reputation, customer base, and more significantly market positioning.
Discounted Cash Flow (DCF) Valuation: This method determines the market value of a firm through discounting of expected future cash inflows.
Valuation Multiples
Specifically, valuation multiples are widely used to value wealth management firms. These multiples include:
AUM Multiple: These multiple values the firm based on its assets under management or AUM, which it tends to calculate as between 1% and 3% of AUM.
Revenue Multiple: These multiple values the firm based on the revenue, usually within the range of 1 and 3 times its revenue.
EBITDA Multiple: That multiple values the firm based on its earnings before interest, taxes, depreciation and amortization (‘EBITDA’) normally falls within the range of 5x to 15 x EBITDA.
Problems in Estimating Corp Wealth Management Firms
Valuing wealth management firms can be challenging due to several factors, including:
Lack of Transparency: Due to the private nature of wealth management firms, their financial statements may be hard to come by therefore making a comparison of the value of these firms challenging.
Complexity of Services: While several services are provided by wealth management firms the distinction between the value of each service offered was a little blurred.
Intangible Assets: Wealth management firms have appreciable amounts of goodwill, people, and capability that are difficult to ascertain their worth.
Conclusion
When it comes to the valuation of wealth management firms, one has to consider all the following factors: AUM, revenues, clients, growth, and competitive advantage, regulatory conditions and management teams. The following are techniques of valuing these firms; Asset based: use of price to book value, Price to asset ratio Income based: use of price to earnings, earnings yield, and PEG ratio Market based: use of Price to sales, price to cash flow, Enterprise value to EBITDA and Enterprise value to sales Capitalization: use of discounting using discount rates including WACC and Gordon’s growth model. You can contact us here.
However, it is difficult to assign values to WMPs because many of them fail to provide relevant information whether they are independent firms or subsidiaries of their parent companies, they deal with services not tangible products, and they incorporate intangible assets in their offerings. Continued advancements in the wealth management industry point to an increased need to gain insight into the determinants of these firms’ value.
