Creating the Most Value in Your Practice

Here’s the Skinny…

The first quarter of any given year is probably the time that most financial advisors visit strategic planning topics  – such as , “How do I get the most value out of my business and/or create the most value in my business?”

Historically, I’ve consulted many advisors regarding the flip-flopped order for the “Top 4 Targets” regarding positioning your practice for clients vs. positioning your practice for market valuation.

Interestingly, I believe the Top 4 Targets are identical in both scenarios (or from both viewpoints – customer vs. buyer), however the order is changed.  

 

The reality is that systems, sustainability, and profits can be hard to assess separately as they can be so intertwined in their functionality.  The main point is that clients are specifically looking for your expertise, while potential buyers know that you will be exiting the business (at some point after they buy it from you) so they are much more concerned with the repeat-ability and duplication of your systems, sustainability and profits.

For a 5-minute deep-dive discussion on how to structure your practice for success, watch Positioning for Clients vs. Positioning for Market Valuation

One of the strongest contributors to systems, sustainability and profits is the overall percentage of recurring revenue from AUM that you receive within your practice (in comparison to non-recurring revenue from commissions).  In fact, the Succession Resource Group has published a 15-page report titled, “Your Guide to Increase the Value of Your Business”.  Specifically, when it comes to revenue they state…

“The recurring revenue currently receiving the largest premiums (from business buyers) are 3rd-party managed assets due to their recurring nature and ability to scale…” 

They go on to publish a chart that illustrates the Industry Average Valuation for Transactional Revenue (i.e., commissions) is a factor 1.0 X Revenue.  Whereas, the Industry Average Valuation for Recurring Revenue (i.e., AUM fee revenue) is a factor of 2.60 X Revenue.

Source:  Succession Resource Group

Obviously, that represents a 160% “premium or advantage” for AUM recurring revenue over commission non-recurring revenue.  And they also argue that 3rd-party AUM is valued higher than other forms of AUM.

Why?

Well, think about it as if you are a buyer and then it makes perfect sense…

If you are buying a practice chock-full of 3rd-Party AUM, you can hit the ground running, not miss a beat, and have potentially endless scalability.  You can continue with the systems that are already in place to gather assets with no worries about having to “climb inside the brain” of a self-managing advisor.

On the other hand, if the selling advisor is self-managing the money, how exactly is the buyer to duplicate that thought process and execution once the seller leaves?  And furthermore, how are they to gain scalability whereas the more assets they gather, the more workload, complexity and liability they create for themselves as the money management component escalates, and by default puts strain on the ability to gather new assets?

Additionally, the “business risk” associated with those assets skyrockets in a self-managing practice.  Meaning, if the customer is unhappy with the money management performance, they have no choice but to leave the practice.  Whereas, an advisor “managing the relationships” rather than “managing the money,” can easily pivot to another money manager that more closely aligns with the investor’s needs or desires.

Simply put, buyers are not looking to purchase a job…  They are looking to purchase a business!

Utilization of 3rd -party money managers enhances your practice in ways that commission and self-managed models cannot.

That’s the Skinny,

One thought on “Creating the Most Value in Your Practice

  1. Hey Mike. This makes all the sense in the world and why I began this transition 16 years ago. I look forward to meeting you and your crew in the next month or so to discuss our next step.

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