A registered investment advisor’s value depends on size and revenue, as well as on other factors such as client demographics, which can indicate whether those accounts are likely to grow or depreciate over time.
Yet only 38% of RIAs truly understand what can drive firm value, according to a new study from Fidelity Clearing & Custody Solutions.
Indeed, many firms simply don’t prioritize value, which could result in a lower than anticipated price for the firm when it comes time to sell, merge or transition the business to internal successors.
Fidelity’s report was based on an online survey conducted in last year’s second quarter and completed by 441 firms, most of them RIAs that custody some portion of their assets with Fidelity Investments.
Fifty-two percent of respondents in the survey said one of their main challenges to maximizing firm value was they had not made it a priority, and only 42% said they conducted a periodic valuation on their own.
This failure to focus on maximizing firm value may come down not having a strong grasp of what can drive firm value. Only 38% of respondents said they had the knowledge to proactively manage valuation.
The study found that many RIAs missed opportunities to maximize human capital, a key valuation driver.
One issue was a leadership void at many RIAs. Respondents said first-generation owners typically spent just 14% of their time managing the business, and much more on other activities, such as investment and client relationship management.
Not only that, but few RIAs said they used key performance indicators to manage their business, and less than half had a written strategic plan or a succession plan ready for implementation.
The study also found that although a majority of firms wanted to pursue an internal transition, less than a third had next-generation owners in place, but these individuals can be extremely important.
Fidelity noted that next-generation owners accounted for 38% of total new assets under management, easing the burden of rainmaking on the first-generation owners.