The market value for RIAs is higher than it has been in years. Now, whether you are making equity decisions in-house or are preparing to sell your investment firm, it is crucial to have a good understanding of how much your practice is worth.
This is why it is necessary to understand the fundamentals when it comes to accurately evaluating your advisory practice. You have to if you want a better feel for what direction you should take your firm, or know the approximate value if you are leaning towards selling.
There are three basic ways to accurately gauge the value of your RIA:
Each will have its own unique aspects that your firm will score better or worse in, but only in weighing the impact of all three cohesively can you determine what the true value of your RIA is.
When analyzing growth, your firm’s rate of attrition is going to be a significant factor. If you have a high turnover rate, it may harm the valuation of your practice and should not be handled lightly.
Compared to larger firms, the attrition rates of smaller RIAs fared much better in response to the pandemic. RIA practices with more than $1 billion in assets under management had an average attrition rate of 45% as a direct response to the pandemic. Smaller firms fared much better, with an average attrition rate of 29%. Some advantages come with smaller RIAs, with lower attrition rates being one of them.
The total amount of your assets added annually is perhaps the largest factor when considering RIA growth. The more assets you take on will equal more outward growth, which will, in turn, reflect positively on your firm’s overall evaluation. More robust growth is one of the most revealing aspects of your RIA’s value. You should also consider your firm’s past growth performance and projected growth for the next 12 months to better determine what your firm may look like in the future.
These types of clients may also greatly influence your firm’s value. How high of net worth does your average client have? What is your minimum threshold? A million? $500,000? All these may play a large determining factor, as your average client’s net worth and amount invested will be reflected in the fees you bring in and any new clients you might attract. For example, it will be much easier for your firm to attract more corporate executive investors if a substantial part of your client base is corporate executives.
Profitability is a colossal factor when determining your firm’s value. There are many moving parts when determining your Ria’s profitability that may play a significant role, from how your advisors get paid, your fee structure, and your overall profit margins.
What are your advisors charging as a fee? Does this fee reduce if your clients have more assets? If so, by how much? These are all important questions when evaluating your firm, as is your firm’s overall fee schedule.
Different RIAs will charge different fees, which will reflect on their valuation and how attractive they are to investors. For example, charging a 1% AUM fee compared to other RIAs who charge 1.5% may play a role, as will the different tiered fees on different levels of your investor’s portfolios.
Profit margins are also going to play an important role as well. While profit does matter, if you have poor profit margins, it won’t reflect well on your valuation. Say your company makes $7 million yearly in profit with $700 million AUM. While this sounds great, it is far less impressive if you compare that to another firm managing a similar amount in assets and taking in $10 million.
When first evaluating a prospective client and their portfolio, one of the first things you will likely do to determine a good plan for them is a risk assessment. This is true for valuing your RIA firm as well.
A clear investment philosophy will enable you to be more consistent and confident with your clients, regardless of what the markets are doing. This will also show them (and anyone else) what your future looks like. A solid foundation provides more stability during market volatility, which along with your market philosophy, can be an attractive attribute for future clients. If your investment philosophy has a proven track record of holding steadfast when the markets are tumultuous, it will be of higher value to you and your firm.
Your revenue concentration will also play a substantial role as well. Where is your revenue going? How much of it is being invested back into your firm in the form of new technology, advisor education, and marketing? Your profit margins may not be quite what you would like them to be, but if a large portion of your firm’s revenue is invested in your business, that’s a notable footnote.
This is, of course, assuming that everything being reinvested results in some form of growth or increase in revenue. If you are thinking of selling your RIA, learn why doing so with ViaWealth has its advantages.
ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.