Far too many financial advisors naively think that their largest asset (their business) has a lot of value and will someday provide them, and their family, a big payday. But year after year, they underinvest in people, process, technology, marketing and branding. In a sense, they are relentlessly milking their RIA cow (their business) for current cash flow so they can spend a lot on toys and an indulgent lifestyle.

Sadly, this means they will likely end up with little residual business value. Instead of retiring and having a fatted calf to sell, they will find themselves with a skinny, malnourished cow — one that frankly has little to no residual value.

Advisors point to the fact that their old clients are sticky, which is true. But the problem is that five to 10 years from now, the advisor will be old (and have less energy) and their clients even older (or maybe dead). The advisor’s business will have stopped growing (since they are not reinvesting back into it and are not attracting young clients), and they will likely have a business that is shrinking or, at best, stagnant.

Why is this problematic? A stagnant or shrinking business with an old founder and older clients cannot attract, nor afford, next generation advisory talent. As such, it won’t attract next generation clients. The reality is that the best and brightest next gen talent will not want to work for a stagnant RIA that fails to make the investments required for long-term success. As a result, top young talent will migrate to RIAs that provide real opportunities or even hang their own shingle and take your clients.

In contrast, if you really care about your business value and can honestly say your goal is to turn your RIA into a fatted calf (for you, your family, your staff and your clients’ benefit), it may be time to stop milking your business so aggressively. In this case, it is mission critical to deliberately reinvest back into your business. In fact, to attract the best clients and create salable enterprise value, you need to invest to grow 15% annually.

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It may actually be OK to choose to over-milk your RIA cow. Just don’t do it with blinders.

So, what’s required to achieve 15% growth? It varies depending on the size, stage, number of significant owners and the nature of your business. But, suffice it to say that if you’re taking out more than 40% of your revenue (as total owner’s compensation, owner benefits, perks and profit distributions), you are likely over-milking.

To provide some rough guidelines regarding how to budget for growth, here are the investments you should consider making (based on a percentage of revenue) to grow your RIA 15% per year.

· People expense: Absent great young people, when you are gone, your business is not a going concern and worth pocket change. In addition, aside from your personal efforts, your business will not attract nor retain great clients. People expense includes: non-owner wages, benefits (top talent won’t stay if they don’t have robust retirement and health care plans), related payroll tax, and employee education and training costs. To grow 15%, non-owner advisors typically should cost between 10% to 20% of annual revenue. Furthermore, non-advisor employees likely should cost you between 20% to 30% of annual revenue.

· Process development expense: To create a real business, you need replicable, scalable processes that are efficient, embedded in technology and deliver real and perceived value to your clients. This typically means investing in consultants and/or in-house staff who can formalize and continually refine lean business processes. This should cost you 2% to 3% of revenue each year.

· Technology expense: This depends on the size of your business and includes hardware, software, licensing, consulting and/or in-house technology staff. Generally, this should cost you between 7% to 10% of annual revenues.

· Marketing and branding expense: This includes things like advertising, websites, collateral, sponsorships, consultants and possibly dedicated marketing staff. While many RIAs spend almost nothing here, in our experience, this expense needs to be at least 4-7% of annual revenues.

You’re probably thinking, “How could my business be valuable if I spend all this money on people, process, technology, marketing and branding?” The reality is that your past profits are only one metric that a buyer considers when calculating what they are willing to pay for your RIA. To be honest, the cash flow you milked from your business in the past is mostly irrelevant. Buyers want to understand your business’s future profitability, prospects for growth, the likelihood your clients will stay when you’re gone and your business’s inherent risk.

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To grow 15%, non-owner advisors typically should cost the firm between 10% to 20% of annual revenue.

If your RIA is not growing, if future growth is uncertain, if clients are at risk of defecting or if there are myriad risks in your business, buyers will pay cents on the dollar at best. At worst, they won’t even want your cow.

Having said this, it may actually be OK to choose to over-milk your RIA cow. Just don’t do it with blinders. If you really want to die with your advisory boots on (i.e. work forever), if you are not overly concerned about your employees and clients when you’re gone, and if you’re primarily concerned with living large now (vs. creating multi-generational wealth for your family), then milk it like crazy.

Just make sure to not drink all the milk. Save some just as you instruct your clients to save for their retirement. This way, if you change your mind and decide you want to eventually retire after all, or if your health does not permit you to work till age 90, you won’t have to retire on a park bench when your business does not provide you a big paycheck.

Brent Brodeski

Brent Brodeski

Brent Brodeski is the chief executive officer of Savant Capital Management.
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