Advisor Legacy

For many financial advisors, their practice is one of the largest assets they own – if not the largest. Yet many advisors don’t understand the key drivers of practice value and how to influence those drivers to manage and grow their practice equity over time. Not only can this negatively impact their ability to monetize equity at retirement, but it can also impact profitability during the life of the practice and an advisor’s ability to make strategic decisions about their business and career.

“We provide advisors with recommendations on how to improve practice value based on the key drivers that push practice value up or down,” says Todd Doherty, Vice President of Advisor Legacy.

Unlike traditional businesses with equipment, inventory, and other assets, a financial practice’s value is largely based on the goodwill of the firm’s clients. Essentially, you own a relationship, which can be tricky to quantify, especially if one is not experienced in valuing relationship-based businesses. Valuation experts like Advisor Legacy that serve the financial services market have proven methods that they rely on for arriving at a number that represents the true economic value of a practice. Specifically, there are two approaches they will take: the market approach and the income approach.

The market approach takes a client centric view of determining value and looks at the quality of revenue, client age, and assets under management (AUM) compared to industry benchmarks. The income approach looks at the business, specifically the team, profit and loss statements, and systems along with a discount rate to account for any risk factors inherent in your practice. The two results are then combined to arrive at a true calculation of value.

As part of its valuation service, Advisor Legacy provides advisors with recommendations on how to improve practice value based on the key drivers that push practice value up or down. The drivers that increase practice value include the percentage of recurring revenue, operating profit, and the ratio of high-net-worth clients (those with over $500,000 in aum) served by the practice. The factors that drive practice value down include the ratio of low value clients (those with less than $100,000 AUM), the average age of clients, and the number of professionals serving clients.

An aging client base is one of the largest factors that negatively impacts practice value. This is because as clients reach age 70 and older, they either start drawing down assets in retirement or pass and leave assets to heirs who may take assets elsewhere. If the practice is not actively engaging in multigenerational planning or other ongoing client acquisition strategies, this will lead to a net loss of AUM over time. According to Doherty, “Without continuing growth of AUM, practice value will peak and then decline, leading to a steady loss of equity for the advisor in their remaining years as a practice owner.” If advisors do not wish to invest in long-term growth, then it is imperative that they understand at which point practice value will peak so they can time their exit strategy to monetize practice equity before it starts to decline.

To assist advisors with planning for such an event, Advisor Legacy utilized a regression analysis of its entire database of completed valuations and M&A data to build a proprietary tool called the MaxVal Predictor^TM. It is included in the valuation report, along with key benchmarks, an analysis of how the practice is performing in the key drivers of value, and recommendations on how to improve practice value. The valuation service also includes a 45-minute session with a valuation expert to discuss results. Because Advisor Legacy’s valuations are such a powerful business planning tool, it recommends advisors secure a valuation annually to monitor and benchmark their progress over time. This is the foundation of a smart equity management strategy for financial advisors.