If I were buying a financial advisory firm, I would discount the firm’s value based on the number of clients and staff over the age of 55. Why? In my mind, the value of a business is based on its future prospects—and aging clients and staff will have a diminishing impact on the firm’s future growth.
Considering that almost every seller is a baby boomer or older, my opening statement is like rolling a stink bomb into the middle of a retirement party. Many advisors have latched onto the concept that their practice’s value reflects the trailing 12 months of revenues, with a premium added for the amount of pain and suffering they have endured over their careers. So to suggest that a firm’s value should be based on the future outlook may seem like heresy to sellers (while logical to buyers).
But is that far off from the way in which you make investment recommendations to your clients? Do you recommend a mutual fund or stock because of how it performed in the past? Or do you premise your recommendations on what you expect it will do in the future? For the purpose of my argument here, I’ll presume you are viewing the road through the windshield, not the rearview mirror.
Take a look at the demographics of your client base. What do the numbers tell you about the rate of addition versus the rate of attrition? And assuming you agree that we are operating in a low growth environment for the average portfolio, how many new clients will you need to generate in order to avoid absolute shrinkage in your business? Consider too the mortality of your client base and what will happen to those assets once your clients have ascended to the Pearly Gates.
What Your Peers Are Reading
It’s dangerous to generalize because some very strong and growing practices are doing great things around the pre-retirement and retirement market. In other words, for many advisory firms, the boomer market can be an engine for growth to the extent that they are systematically adding more clients, IRA and 401(k) plan rollovers and proceeds from the sale of illiquid assets. But research shows that most successful practices run by mature practitioners reach a stagnant phase in business development at some point, only adding new clients incidentally.
Compounding the baby boomer dilemma, not only are your clients aging, but your partners and employees are also in your age bracket. Every time you contemplate adding a young person, you grow resentful that they want to get paid a fair market wage when they will depend on you to generate new clients and strategically guide each decision. “Who do they think they are to demand compensation when the survival of this business is so dependent on me?” You also question their work ethic, their commitment to your business, their cynicism about institutions you revere and their incessant use of texting and ear buds as a way of tuning you out. These negative and often condescending attitudes turn away young professionals seeking a dynamic work environment.
Unfortunately, as an industry, we’ve done a poor job of recognizing that the future of this profession and each advisory firm will depend on how well we recruit Generation X and Y advisors. According to Cerulli, only 22% of the advisory population is under the age of 40 and 5% is under the age of 30. That is a disturbing statistic when we consider how compelling a career opportunity this could be, especially at a time when so many college graduates face huge student loans and a challenging job market. How did we manage to discourage an entire generation from choosing financial advice as a positive, productive, intellectually stimulating and financially rewarding career?
The Client Point of View