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Why Invest in a Professional Wealth Management Business?

The #1 Newsletter for Private Equity

Every wealth manager is NOT Morgan Stanley, JP Morgan, or UBS.

What’s the incentive to be a wealth manager when most people trust the big banks?

Today, we cover:

  1. What Is Wealth Management?

  2. How To Value A Wealth Manager?

  3. What Could Differentiation Look Like?


What Is Wealth Management?

It is the business of managing assets based on financial goals.

Wealth Management includes the following:

  • Tax-Planning

  • Estate Planning

  • Tax Management

  • Investment Management

  • Financial Planning

Usually, high-net worth individuals seek this advice.


How To Value A Wealth Manager?

According to a report from the Investment Advisor Association, these are the characteristics of a wealth manager:

  1. <10 employees

  2. ~$341M in AUM

  3. Uses discretionary authority over asset allocation

  4. No physical custody of assets

A wealth management business is great because profitability is highly predictable. A firm’s revenue is simply the product of their effective fees and their AUM, and the cost structure does not change very frequently.

Valuation is not tricky because wealth managers rarely have some form of differentiation. The two most common methods include:

  • EBITDA Multiple - Typically ~6-8x

  • % of AUM - Typically 1.5-2%


What Could Differentiation Look like?

The wealth management industry is characterized as somewhat mature, with the stubbornness to not change their methods.

They are stuck between being a broker and a financial advisor.

And they like it.

But, the newer firms don’t.

The big banks make acquisitions to capture customer bases. Large AUMs built with trust and differentiation.

Where can this come from?

Digitization and Modernization!

The industry is stacked with financial advisors pilling on paperwork and investment theses that the common man doesn’t have the time to understand.

People want to visualize the growth in their wealth and be assured that they’re on track to meet their goals.

Welcome financial dashboards. Customers should be able to customize their goals and SEE how it changes their asset allocations today.

But, it doesn’t come cheap. It’s hard for wealth managers to invest in this technology, keep fees low, and have a competitive cost structure altogether.


Bottom line is that there has to be trust fostered through digitization.

Digitization helps because it allows wealth managers to ditch financial jargon and speak with images - something that everyone can understand and believe.

Can it be done at a low-cost for everyone? Or, will the big banks finally ditch the long lineup of financial jargon for the common consumer?

See you next week.