5 strategies to boost your RIA’s valuation

July 19, 2017 2:09 PM

Demand for RIA firms is high, and supply is limited. As a result, some advisers considering retirement are holding off while the value of their business continues to rise.

But bull markets don't last forever, the regulatory environment is uncertain and owners aren't getting any younger. Supply in the M&A market will inevitably catch up with demand.

Owners need to do all they can now to maximize the value of their business.

According to LPL Financial's recently released white paper "5 Strategies for Improving Business Valuations" the following criteria are critical for determining — and boosting — the market price of an adviser's book.

Recurring revenue

An asset that generates revenue year after year is the holy grail of the advisory business. Revenue from sources such as advisory fees and trails allows buyers to anticipate cash flow at regular intervals.

"Recurring revenue may be the most important factor in valuing a business," says Jeremy Holly, senior vice president of strategic business solutions for LPL, which performs more than 300 valuations a year. "The more you have, the higher your valuation will be."
Advisory assets are weighted at 2.3 to 2.4 times their revenue in price, according to LPL.

For example, if you have $100,000 in advisory revenue, that will translate to $230,000 to $240,000 in terms of price, on average.

By contrast, nonrecurring revenue is taken at face value — $100,000 in nonrecurring revenue translates to $100,000 in price — assuming this income can be replenished and is not tied to assets currently under any extending holding period requirement, such as annuities or alternative investments.

How to improve:

1) Add more sources of recurring revenue to your book. In cases where it’s appropriate for your client, consider transferring some brokerage assets to advisory platforms.

2) Look to additional sources of recurring revenue that could include unit investment trusts that have auto-renewals, annuities and mutual funds with trail features, and financial planning performed on a recurring fee, rather than on a transactional basis.

Asset concentration

An RIA valuation will assess the top 10% of your book and the portion of assets controlled by those clients, according to LPL. A top heavy book is a big risk because prospective buyers will take a hit if a few of those clients leave.

"Asset concentration is too often overlooked by sellers," says Holly. "But how clients are distributed throughout your book is really important. Buyers don't want a handful of clients controlling a disproportionate amount of revenue."

On average, for books that LPL evaluates, the top 10% of clients comprise 45% of assets. If your concentration is lower, your valuation will be higher.

How to improve:

1) Add more clients with accounts that match the upper quartile of your book.

2) Cull smaller accounts and consider packaging that part of your book to sell to another adviser, reinvesting the proceeds to help grow the business.

Client lifetime value

Buyers tend to appreciate clients who offer greater value over the lifetime of the book, the white paper states. Retirement-age clients offer few prospects for growth, as they’ll either be entering or are in the distribution phase of their financial lives.

Younger clients, on the other hand, are more likely to continue accumulating wealth for a longer period, thus growing their worth over time with the purchasing adviser.

LPL compares a book against averages of all the books the firm has assessed. Valuations are influenced by whether it falls above or below the average. For advisers who have received valuations from LPL, the average percentage of clients over age 70 is 30% to 32% and the average age of clients is 50 to 52.

An adviser with lower numbers will receive a higher valuation. All other factors being equal, a book with an average age in the 40s can command a higher price than one in the high 50s.

How to improve:

1) Form relationships that can expand in the future by reaching out to existing clients and asking for referrals to the younger generation.

2) Offer to help set up a trust, which gives the chance to work with the children or grandchildren of their clients and identify additional ways to add value to their financial lives.

3) Remember your book is a living asset and should be continually refreshed by adding new relationships, particularly with a younger demographic. This will help offset the outflows assets with net positive inflows.

Depth of relationship

"Most advisers think they have more of a client's net worth than they really do," says Holly.

Buyers are keenly interested in the depth of an adviser's relationship to clients. The more a client trusts an adviser, the more likely they are to transfer their liquid net worth to the him or her. And the more the client interacts with their planner, the less likely they are to end the relationship.

How to improve:

1) Directly ask your clients about accounts they have outside your purview. Explain that if you don’t have insight into their complete financial lives, you’ll be unable to advise to the best of your abilities because you won’t know if your recommendations are counteracting strategies in other accounts.

2) Expand your service offering to include products like insurance or estate planning services, which may help bring more of your clients’ total portfolios under your management.

Technology

If a firm's technology is up to date it usually means a practice is already built to scale, making the business more attractive to potential buyers, according to the white paper.

Tools that offer paperless processes and robust client relationship management systems create ease in transferring a book to a new adviser.

How to improve:

1) Incorporate a virtual meeting capability to widen the geographic area of potential buyers. This allows an out-of-state firm to consider purchasing your book with minimal travel.

"You can use Skype or Facetime," says Holly. "You don't want to be confined to office visits. Some advisers give iPads to their clients to facilitate virtual meetings."

2) Begin incorporating new technology into your office. You can start simply, with virtual document signing and work up to a new CRM. When it comes time to sell, you’ll be ready with an easily transferable book of clients who are accustomed to working digitally," according to LPL.