Question by Patrick M: What financial ratios can I use to evaluate wealth management firms?
I am trying to evaluate a wealth management firm, in all aspects including profitability, efficiency, liquidity and solvency.
So far I got ROE and Net Profit Margin for profitability.
I’m using Cost Income Ratio for efficiency (not sure, but it seems like a bank to me? am I wrong?)
I’m not concerned at all about liquidity, given the nature of the business.
I don’t know about solvency.
In addition I also look at AUM and asset yield.
What other ratios or what metrics can I use to compare boutique wealth management firms?
Answer by Juan Valdez
Pattern of inflows and outflows.
How much of the revenue is asset management fees (stable) versus performance incentives (volatile, and therefore worth a much lower multiple)? I know of one buyout deal where asset mgmt fees were valued at 8x, incentive fees at 4x. That was a few years ago during the bear market, so multiples are likely higher now.
Revenue, profits, and assets per employee.
Mix of assets and how it has changed over time.
Performance versus benchmarks.
Returns on some asset classes like private equity are typically quoted in IRR terms. That is not the same as total return.
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