As an advisor, you provide tremendous value to your clients every day. But, what is often overlooked in the advisor-client dynamic, is the value they provide to you. That is, beyond the fees or commissions they pay you for your service, products or advice, your clients are providing you “value.”
By that, I mean that your book of business (your clients) has a very real and tangible value that you can monetize some day when you are ready to exit the industry. This statement applies to all advisors building a book of business, whether you are an independent Registered Investment Advisor, affiliated with an independent broker-dealer or an advisor affiliated with a wirehouse, a regional firm, or a bank.
For the past few years, independent advisors have begun talking more about the concept of having “equity” in their business. Many now are actively benchmarking and valuing their business years before a potential sale or merger to better understand the key value drivers and detractors.
But, regardless of the mechanism you use to exit and retire (whether it involves an Asset Purchase Agreement or Sunset Program offered by your broker-dealer), having “equity” and building something that has value to the next generation of advisors should be a concept that applies industry wide.
There are core elements that make an advisory business have “value” and be transferrable, which every advisor should be aware of and focus on building/nurturing in their practice. These elements are critical to building something that has value to someone other than yourself, making the business more sustainable long-term (i.e., the business will grow faster, longer) and creating stronger bonds with the clients.
Most would assume that the most value in an advisor practice comes from the revenue they generate each year. While revenue is an important component, it is secondary to the strength of the relationship an advisor has with his/her client. In other words, you could have an amazing revenue stream, coming from a small handful of ultra-high-net-worth fee clients. However, if the relationship isn’t strong, there is little to no value. Focus on building strong relationships based on trust and caring (your commitment to helping your clients achieve their goals) and you will have something to build on.
The following are the three components, listed in order of priority:
Create a client service experience that is nothing short of amazing. In a business where everyone has access to the same information, products and solutions, how you do what you do is one of the few truly unique things that will set you apart and tie your clients to you. As you build your client service model, or review it, focus on providing consistent “quality” touches from you and your team, by developing workflows that are replicable.
Ultimately, this will help you build your brand with your clients which is critical to ensure they will take your final recommendation when you are ready to retire and hand your book of business over to someone new. It is important to also involve your team as much as possible, since they will be here long after you have retired, creating continuity for the clients.
This component has the greatest impact on the value of your book of business, and should be reviewed and measured each year
Adding more revenue and more assets will always help increase the value of what you are building, but the focus should be on adding the right type of revenue and assets. From a buyer’s perspective, the most valuable business you can pass on or sell is one that produces predictable
and consistent revenue. For that reason, focus on building a book of business that generates revenue from recurring sources, such as fees, annual financial planning, trails, and/or 12b-1s.
These are a few examples of revenue sources that will garner the most interest from a successor and therefore the most value because they are predictable. To the extent possible, spend time to convert old commission business to these recurring sources of revenue, as well as converting A-share mutual fund business that you might only be earning 25bps on to fees where you are earning 100bps.
We know that past performance is no guarantor of future performance, but it is a useful proxy/tool for projecting your book’s ability to produce revenue in the future. A buyer will pay more for a practice that is growing each year than one that is getting smaller. One of the biggest mistakes advisors make is waiting too long to transition their book of business because they love what they do. By the time many decide to retire (voluntarily or involuntarily), they have been coasting for a few years, causing their growth to stall or even decline – making it a suboptimal time to transition the book. When you are measuring your growth rate each year, focus on measuring these three categories:
Revenue Growth – The most commonly analyzed growth rate is annual revenue, year-over-year. Revenue is what a successor will use to pay for the business and they will do their projections compounding each year, so demonstrating positive topline growth is important. Practices receiving the highest values demonstrate consistent growth AND diversified sources of growth (referrals, centers of influence, seminars, radio show, etc.).
Client Growth – Revenue growth is important, but it is as important to show that you aren’t just growing based on new assets or revenue from existing clients, as that will eventually “dry up.” It is important to be able to demonstrate your ability to add new clients and track exactly how they are finding you (existing client referrals, attorney/CPA referrals, networking events, etc.). It is also important to document any clients you lose and the reason for each. If a successor sees consistent net client growth (more clients added than lost), coupled with revenue growth, then they can reasonably expect that the revenue will continue to increase.
Asset Growth – The growth of your assets under management is one of the most overlooked growth components, but as important as revenue and client growth when evaluating the value or “health” of a business. Pay attention to the net flow of assets using the following equation:
(new client assets + new assets from existing clients) – (lost client assets + existing client withdrawals) = net flow of assets
As the business grows and takes on more complexity, it will also be important to begin measuring profitability, but most deals involve just the sale of your book of business, hence the focus on clients, revenue, and growth.
You will eventually leave the industry, and your clients will work with someone else in your absence. Your ability to receive value for the years of work you have spent building your book of business is dependent on the work you put in now. To your successor, value is created when you build something that can be passed on to the next generation, that they can take and build on. Begin to shift your focus from just production and compensation, to building equity and value in your book of business. This subtle shift won’t have a dramatic impact on your revenue today or make you an overnight success, but
it will help you put an asset on your personal balance sheet that over time may dwarf everything else.
is the founder and CEO of . He is a published author, accomplished speaker, and the nation’s leading consultant on advisor valuation, acquisition and succession planning. Over the last decade, David has assisted hundreds of advisors and other professionals buy, merge, sell, and craft their transition plan for the sale of their business. To learn more about David, please visit .