October 21, 2024

 What is your financial advisor practice worth? 

By Jeff Thorsteinson 

What is Your Practice Worth?

Do you influence the maximizing of your practice’s value? As an advisor, you provide immense value to your clients every day. But what is often overlooked is the value they offer you. Beyond the fees they pay you for your service and advice, your clients provide you with practice "value.” This blog explores the three critical factors that build value in your practice – all of which are entirely in your circle of influence.

What is Your Practice Worth as a financial advisor?

As a financial advisor, you provide immense value to your clients every day. But what is often

overlooked is the value they offer you. Beyond the fees or commissions, your clients pay you for your service and advice and provide you with practice "value.”

In other words, your practice has real and tangible value that you can monetize someday when you are ready to exit the industry. This statement applies to all advisors, whether independent, part of an insurance dealer, or even a bank advisor 

What is your practice worth, and how can you influence maximizing it?

For the past few years, advisors have been increasingly interested in building "equity" in their practice. Some actively benchmark and value their practice years before a potential sale or merger to better understand the critical value drivers and detractors.

Many would assume that the most value in an advisory practice comes from the revenue generated each year. While revenue is essential, it is secondary to the strength of an advisor's relationship with their client. In other words, you could have a significant revenue stream from a small handful of ultra-high-net-worth fee clients. However, there is little value if the relationship isn't vital.

Practice management systems focus on helping advisors build solid relationships based on trust and thoughtful, meaningful service processes. Core elements make an advisory practice have "value" and become more transferable, which every advisor should be aware of and focus on.

These elements are critical to building something more sustainable and attractive to a future buyer:

1) Relationship Systems

Create a client service experience that is nothing short of world-class. In an industry 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 prospects and clients to you. As you build or review your client service model, focus on providing consistent "quality" touches from you and your team by developing replicable workflows.

We recommend focusing on your relationships by:

• Segmenting your book to learn the four quadrants of clients and
• Articulating your value proposition so you can better resonate with prospects and clients

Ultimately, this will help you build your brand with prospects and clients, which is critical to ensuring they will take your final recommendation when you are ready to exit and hand your practice over to the buyer.

It is also essential to involve your internal (e.g., assistant/associate) and external (e.g., dealer, wholesalers, vendors) teams as much as possible since they will be here long after you have retired, creating continuity for the clients and your buyer.

This component has the most significant impact on your practice's value, so it should be reviewed and measured annually.

2) Service Systems- your progress update process

Adding more revenue and assets will always help increase the value of your practice, but the focus should be on adding the correct type of revenue and assets. From a buyer's perspective, the most valuable practice you can pass on or sell is one that produces predictable and consistent income. Therefore, focus on building a book that generates revenue from recurring sources, such as fees and annual financial planning.

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, consider converting old commission business to these recurring sources of revenue, as well as converting from an A-Series mutual fund business that you might only be earning 50-70 bps on to a fee-based practice where you are making 100 bps. In some cases, even with this lift, total client cost can be less overall!

Additionally, practice value increases as you become more systemized. When helping advisors build systems in their practice, we focus on three core areas to automate:

• Investment Consulting Process (ICP) for clients and prospects. This may involve creating two ICPs: HNW clients to receive intense customization and non-HNW clients to receive a more standardized/digital version of your ICP.
• Client Service Process (CSP) supports your ICP and maintains your client base.
• Marketing Systems to acquire new clients and capture bigger opportunities.

Ensure that you are not the one doing all the work. To maximize practice value, you must remove yourself from the equation. This effort requires a team. Therefore, team alignment is a significant area of focus once you have articulated your values and systemized your practice. 

Team alignment involves assigning responsibilities to the people best suited to deliver each service type. This will require aligning your team to meet your new service expectations. Only when this is in place will you be able to capture the following biggest opportunities in the market?

3) Growth

A buyer will pay more for a growing practice each year than one in decline. One of the advisors' most significant mistakes is waiting too long to transition out because they love what they do. By the time many decide to retire (voluntarily or involuntarily), growth will have flat-lined or stalled altogether, making it a suboptimal time to sell. When you are measuring your growth rate each year, focus on measuring these three categories:

Revenue Growth—Annual revenue, year over year. A buyer will use the revenue and free cash flow to pay for the purchase, so demonstrating positive top-line growth is essential. Practices receiving the highest values show consistent growth and diversified sources of growth (referrals, centers of influence, seminars, etc.)—if you can show a three-year track record of growth, the better.

Client Growth – Revenue growth is essential, 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 essential to demonstrate your ability to add new clients and track precisely how prospects source you (existing client referrals, professional referrals, networking events, seminar selling, etc.). It is also essential to document any lost clients and the reason for each. If a successor sees consistent net client growth (more new clients than lost) coupled with revenue growth, they can reasonably expect the revenue to continue to increase. This has a positive impact on valuation.

Asset Growth – The growth of your assets under management is one of the most overlooked valuation components. Still, it is as important as revenue and client growth when evaluating practice quality or "health." 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 inflow of assets

As the practice grows and takes on more complexity, it will also be essential to

measure profitability, but most deals involve just the sale of your practice, focusing on clients, revenue, and growth.

Bottom Line

Eventually, you will exit the industry, and your clients will work with the buyer in your absence. Your ability to maximize practice value for the years of hard work you have invested in building your practice is directly related to the effort you put in today. Your successor will value your practice more when they purchase and integrate a systemized practice with tried-and-true systems.

So, beginning today, consider shifting your focus from production and day-to-day servicing to building enduring practice value. This subtle shift won't dramatically impact your revenue today or make you an overnight success. Still, it will help you put a high-quality asset on your balance sheet that, over time, may supersede everything else.

Would you like to discuss what to do to optimize your practice value? 

Need a boost with how to increase practice value? Call Grant Hicks or Jeff Thorsteinson for a free, no-obligation discussion on how to optimize and build the value of your practice.

Our Practice Management resources - Comprehensive Practice Management checklist

https://practicemanagement.getresponsepages.com/

Updated Technology Checklist for Financial Advisors  

This checklist is five years' worth of research on the best processes elite financial advisors and their teams implement to acquire and service ideal clients while running an efficient practice.   

https://technology-checklist.getresponsepages.com/ 

We are here to serve your practice, let’s talk

Jeff Thorsteinson

www.advisorpracticemanagement.com

For elite practice management resources to manage and grow your business 

Tel 778-628-3165 

Email jeffthorsteinson@hotmail.com

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Contact us to help get clarity around your goals on paper, and have the goals conversation by contacting Jeff  at  jeffthorsteinson@hotmail.com  regardless if we work together, let’s have a chat and listen to your biggest practice management concerns to help you get clarity around your future business.

Jeff Thorsteinson  and  Advisor Practice Management's combined financial advisor clients manage over 8 billion AUM, and earn over $80 million dollars combined! 

Enthusiastically yours,

Jeff Thorsteinson 
Advisor Practice Management
www.advisorpracticemanagement.com

PS Where do you want your financial practice to be at the end of 2025? AUM, Revenue, and time off? 

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