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Practice Management > Building Your Business

Consider the Clients

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Based on the number of queries that Moss Adams and Advisor Impact get each week from interested buyers, there is a tremendous demand for advisory practices today, even if there are not that many actual transactions relative to the total population of firms. Amid the frenzy, there is a tendency to rationalize the risk one takes in making such a purchase. This is not to say that buying a financial advisory practice is a bad decision–it isn't. But relatively small service businesses that are often dependent on one person carry a higher level of risk than a manufacturing or distribution company or, frankly, any business that is not tied to the personal reputation of the owner and her relationship with clients.

While the risks are clearly present, there are many compelling reasons why the interest in acquiring advisory practices is growing. Advisors are, on average, getting older; do-it-yourselfers have seen the light and are now more likely to seek professional advice; and there are the twin tsunamis of the 76 million baby boomers nearing retirement and the liquefaction coming out of concentrated and restricted positions held by wealthy people. In addition, the shortage of talent in the advisory profession means that large firms with clear career paths will probably have the corner on recruiting both staff and clients.

As with any investment, however, the basic principle behind valuation is the relationship between risk and return. The higher the degree of uncertainty, the higher risk; the higher the risk, the lower the value.

So if you are one of the many who is thinking about buying, or merging, your book of business or a substantive advisory firm, no doubt you have thought about risk. Are you paying too much? As a potential seller, you may be trying to resolve the same question but from a different point of view. Are you asking too little?

What are the factors that will help you answer those questions? Practice profitability, brand, reputation, systematic marketing, and size are all factors in the valuation of a practice. In the end, however, most advisors are selling their client list. For this reason, we recommend that prospective sellers do as much as they can to enhance client transferability and growth in order to influence value. Conversely, we encourage buyers to examine the client list they are about to buy in terms of:

  • Client turnover;
  • Client potential;
  • Client demographics;
  • Client satisfaction;
  • Profitability of client relationships;
  • Propensity of clients to refer business.

In thinking about the elements of risk, you can easily get the sense that buyers and sellers alike have little control. That said, good information goes a long way to helping you assess the scope of that risk and, in some cases, reducing it.

We don't view rules of thumb as particularly helpful in quantifying the uncertainty that exists in a practice when it transfers, because such models tend to assume all practices are the same. Worse yet, rules of thumb assume all practices are average. Regardless of our intransigence on this issue, we believe that financial advisors could do far more to enhance the value of their practices when it comes time to sell rather than letting luck be their lady.

The same may be true for buyers who in their due diligence may be focusing excessively on a firm's numbers to try and make assumptions about the future. While it is critical to understand a particular practice's economics, what is more interesting is what buyers could glean in the due diligence process by eliciting direct feedback from clients — the real asset in any business and the individuals who, arguably, have the most control over risk.

The reality is that buyers speculate on potential, but do not ask the clients about their needs. They speculate on client retention, but do not ask clients if they are satisfied with the current advisor. They speculate on 'fit' but do not ask the clients about their investment philosophies, goals, or service needs.

A well-structured and well-executed client survey can mitigate some of the risk in this process or, at the very least, inform the right price. Just as we conduct an audit of a business, we should conduct an audit of the clients. For buyers, a well-structured survey of clients will provide detailed information on client retention, additional opportunities, and the potential costs of service delivery. For sellers, a well-structured survey of clients will provide a quantitative demonstration of value and support the asking price.

The Process

Ultimately, a survey is the job of the seller in any transaction. While the buyer may demand it, the information is equally important to the seller and he or she should fund or manage the process. Although gathering client data and feedback should be part of the overall process of getting a business ready for sale, clients do not necessarily need to know how that information is being used. As far as clients are concerned, a client survey is an opportunity to share their views on service and is a good idea whether or not you sell the business. It's the right thing to do.

There are three ways to elicit feedback from clients. You can take an ad hoc approach and ask clients for feedback at the end of a meeting, you can conduct a telephone survey, or you can conduct a written survey. To decide on an approach, you'll need to weigh the costs of the program against the depth of information you will receive and the extent to which feedback is provided honestly. In the case of the purchase or sale of a business, a written survey is the best approach, providing the best balance between objectivity, cost, and depth of information.

Any client survey provides valuable information on clients. If you are considering a sale, however, the questions should be crafted to reflect the information needs of this particular circumstance and would include, but not necessarily be limited to, the following:

  • overall client satisfaction with the principal

    and/or junior planners;

  • overall satisfaction with the administrative team;
  • client expectations around frequency of contact;
  • client comfort in working with the team;
  • interest in and need for additional products and services;
  • share of client's wallet;
  • assessment of what is most important to the client;
  • willingness to refer.

In order to understand how price, risk, and client feedback line up, we'll look at five aspects of risk in a typical sale and the feedback that would be helpful.

The Client Retention Factor

Price is positively influenced by the "stickiness" of client relationships. If there is an underlying dissatisfaction with some aspect of service, the client will be more likely to leave, even if the new advisor holds out the carrot of better service "under new management." A more satisfied client base is ultimately a more secure bet for the buyer.

Among the questions that will help you assess current client satisfaction are the following:

How satisfied are you with the overall relationship with your advisor?

Are you comfortable providing referrals to your advisor?

Advisor Impact and Moss Adams survey clients on behalf of their advisors on an on-going basis, resulting in a database of feedback from well in excess of 25,000 investors. In our research we look at both overall satisfaction with the advisor, which is generally high at 4.6 (on a scale of 1 to 5 in which 5 is "very satisfied"), and the risk of attrition, which is generally low at 7% (these "at risk" clients give their advisor a rating of 3 or less out of 5 on an overall satisfaction scale). Remember, however, that you are not buying or selling the average. You are buying or selling a specific business and you can't rely on industry averages to give you comfort.

The Untapped Potential Factor

Price is positively influenced by the scope of untapped potential that a buyer sees in a business. While you can make some assumptions about potential based on the age and stage of a client base, a survey allows the buyer to gauge client appetite for additional products and services. Further, an effective survey will provide you with valuable feedback on the current advisor's share of wallet, another substantial opportunity for the buyer.

Among the questions that will help assess untapped potential are the following:

Which of the following services are you interested in learning more about (with list of possible services)?

What are your total investable assets?

What types of insurance do you have in place?

What percentage of your investable assets are with this advisor?

Our research suggests a strong appetite for more information on a range of different services, which suggests that buyers can hit the ground running by focusing on increasing average revenue per client. The table below shows the percentage of clients who said they were interested in learning more about a range of different services.

Similarly, a targeted question set will give you substantial information on the potential to increase your share of the client's wallet. At an industry level, we asked clients what percentage of their total investable assets they had invested with the one advisor who sent them the survey, who is assumed to be the seller in this case. (see Share of Wallet chart below).

The Service Expectations Factor

Price is positively or negatively influenced by the buyer's assessment of the return on investment, which will be driven by the profit generated from each client relationship. Because client profitability is driven by the amount of time and effort that you invest in client relationships, a buyer should test client expectations on service. Among the questions that will help assess service expectations are the following:

  • How often do you expect to meet with your advisor?
  • What percentage of meetings should be face-to-face?

The chart, "How Often Do Your Clients Want to Meet?" (see below), suggests that clients are generally reasonable with respect to contact expectations, at least on an industry level. If, however, the clients of the practice you were buying indicated that they expected more contact, that would have a direct and negative impact on either profitability or client retention.

The Fit Factor

Price is positively influenced by the extent to which the approach of the new advisor aligns with the needs and expectations of clients. One of the most difficult things to test, in advance of taking over a book of business is how well the new advisor's personality will fit with the existing clients. To some extent you can test this against the personality of the outgoing advisor, ideally using a standardized assessment. If you and the outgoing advisor have very different personalities, then stop to note the red flag that is in front of you. You can, however, test if there is a fit between your overall approach to financial planning or investment management and the needs of the clients.

Among the questions that will help you assess fit are:

  • What is most important to you in a relationship with a financial advisor?
  • How would you describe the role of your financial advisor?

The Team Factor

Price is negatively influenced by the extent to which clients see the selling advisor as the key to the service experience. If clients see the overall service they receive as being the result of a team effort rather than being driven solely by the senior advisor, then the business is a more secure bet. A client who is 'educated' on a team approach is less likely to leave if there is a change at the top.

Among the questions that will help you assess the team are the following:

  • How comfortable are you discussing your plan with team members, other than the senior advisor?
  • How satisfied are you with the knowledge and skills of your advisor's team?

There is, of course, no way to eliminate risk from the purchase or sale of a business, but, the more information you have, the better the chances you will make an informed decision on price.

So as the market continues to heat up for acquisitions of financial advisory practices, buyers have a responsibility to themselves to be more informed about what they are getting into, and sellers have an opportunity to influence the outcome. When so many advisors have a client base that looks like a depleted oil well, wiser advisors are taking systematic steps to understand what they need to do to shore up their client list before preparing their business for sale in order to ensure continuity in the practice once it is sold. But even if an advisor is not contemplating an exit any time soon, the client survey process is one of those actions an advisor can take to build a practice to last, if not one for sale.

Mark Tibergien is partner in charge of the Financial Services niche at Moss Adams LLP, and author of How to Value, Buy or Sell a Practice to be published by Bloomberg Press in July. Julie Littlechild is president of Advisor Impact, providing client surveys for financial advisors. To learn more, go to or

Advisor Impact provides monthly practice management tips to advisors. See the latest tip by clicking on"Web Extras" at


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