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.

Value Creation

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.

Fidelity’s research showed that many RIAs were not doing enough to develop critical personnel, with only half of respondents expressing confidence that their people had the necessary skills and training to help the firm meet its strategic goals. Client Relationships

The study identified areas for concern in client demographics and relationships. Researchers found that clients 70 and older represented nearly a quarter of all relationships and controlled 28% of firm assets.

Yet only a small fraction of RIAs reported robust interactions with their clients’ adult children — meaning that a client’s death often leads to a loss in assets. This lack of engagement, Fidelity estimated, could result in a loss of 10% of firms’ current assets under management in the next decade.

How clients feel about the firm is also a problem at many RIAs, according to the study. Only 29% of respondents believed their clients felt a stronger connection to their overall firm than to the individuals they interacted with — the “key person” risk.

At the same time, only a fifth of firms had conducted any type of client satisfaction research in the last three years that might help them build deeper relationships.

One way to keep clients satisfied is to have a deep and well-rounded set of offerings, but many RIAs failed to do much more than manage investments, even if they did offer other services.

The study found that at firms offering an array of services, only 70% of clients received any kind of financial or retirement planning, and less than half received any type of trust and estate or risk and insurance planning services. A large percentage of these firms said they lacked the deepest expertise in some areas of their offering.

“The biggest takeaway here for RIAs is that knowledge is power,” David Canter, executive vice president, practice management and consulting, Fidelity Clearing & Custody Solutions, said in a statement.

“In order to realize the full potential value of your firm, you need to know what can drive that value first. Then, make the important decisions that may ultimately help you achieve those long-term goals.”

Fidelity offered a multistep approach for RIAs to maximize the value of their firms.

— Check out How to Differentiate Yourself From Other Advisors on ThinkAdvisor.