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Practice Management > Building Your Business

Add One More Name To Your Client List ...Your Own

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Every client, whether active or prospective, has a plan in place to reach his or her financial goals. In many cases, unfortunately, the plan is to do nothing–to plan to not have a plan. This approach is an active decision, but not effective in the final analysis.

As independent financial advisors, we tend to use a similar methodology when planning for ourselves. Often, we spend so much effort focusing on our clients that we do little to secure our own futures until the last moment. I have experienced this situation with advisors during discussions about practice management and transition while negotiating and taking over their businesses. And from those experiences, I’ve witnessed firsthand how significant the impact of a succession plan can be when the time comes to put it into action.

The key to success

A program offered by my broker-dealer and its succession planning partner has been a valuable resource in my firm’s strategy for internal succession, as well as our success in acquiring other practices. That success hinges on the quality and pricing of the transition.

As advisors, we assist our clients in making sound financial decisions and creating strategies to help them reach their financial goals. Statistics suggest, however, that we do an inferior job in planning our own financial needs and business structure. In fact, most advisors, regardless of age, have no plan for transitioning their practice in case of death, disability or retirement.

I know several independent advisors who not only don’t have a transition plan, but also fall short of having sufficient coverage or resources to handle a disability or the means to retire. Just as with the clients we serve, we too will inevitably experience life issues that bring retirement to the forefront. For this reason, the time to start preparing for this eventuality is now.

As we well know, the value of an asset is strictly limited to what someone is willing to pay for it. Therefore, we need to be aware that a gap may exist, perhaps even a sizeable one, between how much we perceive our practice to be worth, and what we ultimately receive for it. We have built our practices from scratch, and feel strongly that we can command the ultimate price for our business. However, a prospective buyer may see the situation in a different light.

Many methods are used to calculate the value of an advisory business, and the manner in which the final figure is determined could potentially be endless. We have all likely been guilty of allowing our egos to interfere with determining a fair value of an asset, whether as a buyer or a seller. So when it comes to transitioning our business, it becomes extremely important to not let our judgment become clouded.

Pricing models

There are many factors to consider with how your business is modeled and operated. Among the questions to ask:

? Does your practice have a single advisor or a team structure?

? Are you primarily compensated via commissions or fees?

? Is the business healthy and growing or has it been allowed to stagnate and contract in recent years?

? Do you primarily sell insurance or commissions-based securities or are you more involved in fee-based asset management?

? Do you have a proprietary means of managing assets or do you look to third party money managers?

? Do you want to retire now, in the next 12 to 18 months, or are you willing to work out a transition over a longer time frame?

All of these issues dramatically impact the value and the means to transition out of your practice. Advisors who are primarily commission-based will likely look to sell for a percentage of their prior 12 months’ revenue. There may be some room for negotiation that could involve from 0.8% to 1.5% of the prior 12 months of income generation.

A sole practitioner will generally have a lower valuation than one who has created a firm or team approach. Remember, the greatest asset we have to sell is our own “goodwill” and ability to manage the clients we’ve already cultivated. Client retention is a huge issue with which to contend during a transition. Most clients are not necessarily thrilled when their advisor is, in their eyes, suddenly looking to retire and replaced by someone new, especially if the successor is someone they don’t know.

Other methods of valuation include multiples of fee-based revenue (a higher multiple than you might think depending on how well you have established the business), or a percentage of net operating profit. The quality of your book of business is not the only factor to consider with this last method since overall profitability has a big impact on a business that is not necessarily managed as well as it should be.

An older advisor who was primarily commission-based and who had allowed his practice to contract over the past two years was one of the last practices that my firm helped to transition. He had no plan in place, yet he decided he was ready to retire from the financial services industry. This decision left him with little to no choice about what to do with his book of business and the value that would be attached to the business. With his options limited, the end result was far from what he had hoped for.

Another practice we assisted was of a similar model, although better structured. The business consisted of a sole advisor with an extremely healthy view of the value of the business. Detailed research showed an extreme slant toward commissioned-based securities transactions with little recurring fee income and a contracting client base.

Using one of several pricing models, the figure calculated was considerably less than the seller anticipated. Following a detailed explanation of the valuation process and model used, the advisor decided to rework his business model with a strong emphasis on fee-based planning and asset management that, if successful, should bring him close to his target valuation.

We as advisors are not that different from the clients we serve. We are good at what we do professionally, but much like the cobbler’s children are often the last ones to receive the attention we need in our own financial lives. So don’t forget to add yourself to your list of clients.


“We are good at what we do professionally, but much like the cobbler’s children are often the last ones to receive the attention we need in our own financial lives.”


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