Advisors succeed in creating wonderful plans for their clients, but are failing to plan for themselves—and that could cost them when it comes time to sell or transition their practice, according to a new Fidelity study.
According to research from Boston-based Fidelity Clearing and Custody Solutions, few RIAs are able to calculate the value of their business.
“There’s an opportunity for advisors to look at their businesses more like investors looking at a company or fund,” says David Canter, Fidelity’s executive vice president of practice management and consulting. “They should look at their business with the objectivity of a venture capital or private equity firm and beyond a multiple of earnings.”
Furthermore, the Fidelity RIA Benchmarking Study found that many advisors don’t prioritize increasing their firm’s value, which may lead to lower-than-anticipated prices when they eventually sell, merge or transition the business to successors.
“RIAs should be asking themselves what their unfair advantage is,” Canter says. “Growth is hard, it takes focus and effort. A lot of the firms out there are growth voyeurs. They like to talk about growth, but at the end of the day they don’t take action.”
While 72 percent of high-performing RIAs have a strategic plan, only 44 percent of the study’s total respondents had such a plan.
“These firms have been actively planning for their future,” Canter says.
According to Fidelity’s research, 38 percent of firms report having a strong grasp on what drives firm value. Among “high performing firms” who outperform their peers in areas of growth, productivity and profitability, 48 percent report having an advanced understanding of the factors that drive value.
“Don’t wait until it’s too late: Engage a third party now and get an honest valuation,” Canter says. “Third-party valuations are preferred. Internal metrics are more susceptible to inaccuracies and biases.”
The high-performing firms were also more likely than their peers—75 percent versus 61 percent—to have an agreed-upon mechanism for determining value.