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Whether implementing a business continuity plan, developing a succession plan, considering adding advisors, or are just curious, it is inevitable that an RIA business owner will need a formal valuation of their business at some point, and likely at many points, of their firm's lifecycle.
Beyond needing it for the examples listed above, understanding the key drivers that impact an RIA's Value can be valuable pieces of information, especially as it relates to strategic business planning and KPIs. Traditional metrics like AUM and Top-Line Revenue will remain at the forefront but there are may more metrics beyond that that are required to run a thorough analysis.
When developing your firm's KPIs, or doing your annual business review, should you be looking at the data that the "smart money" is focused on when making an investment? Maybe, maybe not. But it is good to know what they are looking at. Beyond that, oftentimes, it is the data on the "margins" where you can have the most influence. It is also where the story of a firm is truly painted.
In tru Independence's role as the strategic partner to dozens of growth-focused Independent RIAs, we oftentimes advise our clients on the right strategy and help drive towards execution. As the steward of our client's data, we also guide you through the requirements to do the analysis. With our experience, we've learned a thing or two.
Below is a list of 5 datapoints beyond the traditional numbers that we oftentimes find when we help collect and advise on the data needed to run an RIA Business Valuation. You can reach out to our team here if you'd like to discuss further.
Understanding one's client demographics informs the stability of a firm’s revenue, a firm’s ability to grow revenue, and how client accounts may grow or depreciate over time. The average age of your clients serves as a foundational point to understand where you stand. It can be quite simple... "older" clients are typically more conservatively invested and oftentimes taking distributions (whether it be for their lifestyle, or required through RMDs).
To track this data point, you can go to your Custodian where new account paperwork is processed and date of birth data is held. More ideally, the data feeds into your Portfolio Accounting System and CRM.
If your average age is on the higher end, understanding your next-generation strategy will become paramount.
Having a close relationship with your client's next-generation is the easiest defense against losing the assets at the time of a transition. Not only do you want to understand how deep the relationships are, but what is the strategy and how is it put into practice?
With an estimated $84 Trillion to be transferred in the next 20 years (per Cerulli Associates), or more commonly known as the "Great Wealth Transfer", you don't want to be left behind without a plan. And you certainly do not want to acquire or add an advisor to your team that is not set up for long-term success.
This datapoint is harder to track. Oftentimes when we ask the question, the result is a manual exercise. Do you really have a next-gen strategy if you do not know how to track it across your client base? Most CRM systems allow for "groupings" or "tagging." You can also add family members to a client Household for tracking. If you are not leveraging these features today, we highly encourage it.
One of the best indicators of client loyalty, the average tenure of your client relationships (in years) is a testament to your service, performance and satisfaction. The higher the number, the higher the likelihood clients remain with a firm during a transition or succession.
Your ability to track this stat is dependent on how much data you have - a "breakaway" from a wirehouse is less likely to have the data history. In any event, you can use your CRM to add the year the household joined your firm. If it comes down to it... the one-time manual data entry project and lite ongoing maintenance will be well-worth it.
This can be calculated in a few ways, most commonly represented as a % of your Households in relation to Total Revenue or Assets. For example, 5% of clients might make up 20% of the firm’s Revenue.
Another example, understanding the % of Assets or Revenue across age brackets, like ages 30-50, 50-70 and so on.
The "risk" of concentration is obvious from the perspective of a buyer. For firms with high concentration, highlighting strengths in other areas becomes crucial to demonstrating the deepness of the relationship.
Offering services beyond investment management and planning is attractive to both buyers and sellers. It means stickiness, and in some cases, the acquirer is interested in offering these services into their broader ecosystem.
Revenue Source by business line can be tracked in your P&L, oftentimes through tools like Sage Intacct or QuickBooks Online. This should be reviewed consistently and leveraged to help build and track Firm KPI's.
To track the Concentration of services, we often advise you use a "tagging" or "grouping" feature in your CRM. Not only does this enable you to run reports to track KPI's, you can use these features for marketing lists for targeted communications.