In the quest for success, the smart money has always gone to solid planning and forward-looking analysis.

Consider politics: The presidential election is in November, but the candidates have been laying the groundwork for their campaigns for years, even decades.

In Hollywood, executives are lining up blockbusters for summers to come.

And baseball front offices across the country are mining Moneyball sabermetrics to find World Series stars for next year and beyond.

What applies to politics, entertainment and sports also holds true for advisors whose “big win” is building, growing and maybe even one day selling their registered investment adviser firms at an optimal price.

Some might get lucky, of course, and, like J. Pierrepont Finch in the Broadway classic, "How to Succeed in Business without Really Trying." But counting on that is like counting on winning the lottery to fund one’s retirement.

Even if selling isn't on the short-term horizon, it is vital to understand the impact that different drivers have on a firm’s valuation. After all, valuation is a reflection of the preparation taken to build the business and set the firm apart.


Fundamental drivers -- size, revenue (including growth and profitability) and organization -- are important to all would-be buyers.

Even if a firm isn’t on the market, these factors can help determine its competitive vigor. They are the can’t-miss metrics that show how vibrant a company actually is and how bright its future could be.

Size is the holy grail of valuation, akin to sitting in the Oval Office, smashing a Hollywood box office record or bringing home the Commissioner's Trophy. A firm doesn't get to scale without getting a lot of other valuation drivers right.

And there is no way around it: Bigger is better.

Bigger firms have more clients to drive revenue. They have greater client diversification to mitigate losses.

They have larger staffs so that they can add more services and expand their reach. And they can leverage more resources to build their client base without adding significant new costs.

But RIA firms can improve other valuation drivers to fuel their overall growth.


A firm’s potential for growth and profitability plays a significant role in its valuation.

To evaluate these factors, take a long, hard look at the firm’s revenue drivers.

Does the firm have plenty of talented people working toward a shared goal, or is it centered on one or two rainmakers?

Are there consistent processes for information technology, human resources and operations, or is the firm reinventing the wheel with each new client, hire or tech upgrade?

Can the firm raise revenue and profitability with new services and capabilities?

How strong is the firm’s market recognition, and can all team members serve as persuasive ambassadors for the brand messaging?

The answers can tell the tale of a company whose best days are ahead of it -- or behind it. Having in place the right people, processes, capabilities and marketing can help ensure future growth and profitability.


Implementing an effective pricing structure is also a core component to revenue. Fees that are over or under market rates can negatively affect profitability today and into the future.

“When our firm looks at potential investments, we do a detailed analysis of each client relationship in the context of overall firm growth and potential,” says Mark Hurley, chief executive of Fiduciary Network, a Dallas-based financing partner for wealth managers. “Now, more than ever, the smart money is focusing on valuation.”

Adding new services and capabilities -- such as estate, tax or retirement planning -- can be valuable to the profits of a firm but only if the offerings are a natural fit. If taxes bore an advisor, for instance, and the firm doesn’t have the staff to handle an increased workload every spring, this service may end up costing more in morale and client goodwill than was intended.

New capabilities have to match the firm’s existing skills, client demographics and partnership opportunities. In other words: Don't position the firm as a popcorn flick when it is angling for an Academy Award.

Evaluating an organization includes both the quality of the team and the culture of the firm.

These are inherently soft metrics, but visitors can usually tell a healthy company as soon as they walk into its offices. Phones are ringing, people are active and someone is there to greet guests.

Culture is an overused buzzword, but it sets the standard for how individuals and teams work together. When clients go to an advisor with complicated situations and complex needs, the firm’s team must be willing to work together to get them solutions -- seamlessly.

Firm size, revenue and organization are usually top-of-mind for RIA owners, whether their five-year plan includes a sale or not.

Focusing on these fundamental drivers won’t change the value of a business overnight. But playing the long game can set advisors up for success on their own terms.

And, for most advisors, that is the big win.

David Canter is executive vice president, Practice Management and Consulting, for Fidelity Clearing and Custody, where he is responsible for leading the development of a comprehensive Practice Management program structured around helping advisors accelerate growth, streamline operations and manage risk.

This story is part of a 30-day series on smart ways to grow your practice. It was originally published on July 21, 2015.

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