The Advisory Career

Equity and Succession Planning for Financial Advisors

Practice valuation considerations

by Tiffany Markarian

Ms. Markarian is the managing director of Advantus Marketing and adjunct Director of Consulting for Weylman Consulting Group. She can be reached at 617-312-0591 or at

Part I in a two-part series

There comes a time in every financial advisor’s life that a decision needs to be made regarding the future of their practice – whether to retire or transition out of the business to focus on other endeavors. In the past, many advisors simply announced they were leaving or retiring and it was up to their firm or broker/dealer to reassign the clients. The process seemed to work, because there were really no other options discussed.

The downside of this model is that clients could end up feeling the loss of their relationship with the advisor; and, the advisor could possibly have left the equity value of their practice on the table. During their productive years, most advisors spend their time focusing on how they will grow the business and retain the clientele and assets they have built. Unfortunately, the vast majority of advisors have not focused on how they can maximize the true value of their practice through equity and succession planning – an oversight which could result in a loss in future practice value.

Valuation and succession planning for a financial services practice not only focuses on preparing for the eventual retirement or premature death or disability of an advisor, but also on how to maximize the future equity value of the practice. By thinking through these matters early, you have the best chance of realizing the value of your lifetime of hard work.

Over the past 15 years, the topic of equity and succession planning has not only surfaced, but has been executed by thousands of advisors through valuation models and resources, particularly in the independent and hybrid broker/dealer worlds and the RIA space. During this time, valuation methodologies for financial services practices have been developed, and further refined, along with the establishment of a secondary market for practice buying and selling. The valuation methodologies have also evolved from just focusing on the valuation of fee revenues and assets under management (AUM); to a model where insurance lines within a practice can now also be incorporated using a variety of wealth indicators and client relationship indexes.

Equity and succession planning for financial advisors involves pre-planning, skilled valuation, operational strategies, the legalities and due diligence of the buy-sell process, and post-transition procedures to retain the practice assets and clientele. As a result, it is understandable why the process can be daunting for advisors to consider – and by the time they start thinking about it, many advisors are left with little time to properly maximize their practice value. This article focuses on several of the dynamics advisors should consider in regards to the valuation process, and how valuations are most often calculated. “Buying and Selling Considerations” will be featured in a subsequent article. If you are thinking about your own succession plan, or want to maximize the future equity value of your practice, the following are several of the core factors that should be initially addressed in the process.

How Much Could a Financial Practice Be Worth?

At the high-end of the spectrum, many advisors could find their practice is valued at two times trailing twelve-month revenues or more. However, those high valuations are a direct result of many operational aspects of the advisor’s practice being well-aligned and working properly – therefore it cannot, and should not, be an expectation or guideline. An advisor could very well have a practice valuation that is far below their expectation, based on how they opt for revenues to be paid, a lack of operational staffing, misuse or lack of technology in the practice, the level of their client relationships and their product mix, among many other important factors. It is also heavily dependent on the demographics of your clientele and whether or not there is a market or buyer for your type of practice. It is also important to understand that not every company or broker/dealer you affiliate with will allow you to value or sell your practice to another advisor or firm, even within the primary broker/dealer. Every company is different and your contract will dictate your options.

It is crucial to develop an equity and succession strategy that is blessed and supported by your firm or broker/dealer. If you are independent, you need to make sure that your succession and continuity plan is one that you can implement operationally. Every practice is different and each succession plan requires a different set of considerations. To achieve a meaningful outcome for all parties, it is important that your succession and continuation plan is tied to the considerations a buyer would assess if they were to purchase or join your practice as an equity partner.

These considerations can include, but are not limited to:

  • The revenue stream that has been generated by the practice over the past several years.
  • Projected revenues based on the demographics of the clientele and the portfolio of assets.
  • The ability to readily analyze, and market to, your book of business through technology.
  • Additional client needs that could be solved based on age, wealth and other demographics.
  • The likelihood that the assets and clients will remain with the practice based on the clients’ history, age and level of relationship (i.e. loyalty) with your firm.
  • The ability for you, or your staff, to stay on after the transition, if desired by the buyer.
  • The make-up of your practice and whether or not your services and offerings align with the buyer’s services, offerings and skills.

Assuming that you are in a situation that allows for a practice buy-sell, you should also consider that practice valuation and sale does not always have to be tied to your full retirement and departure from the business. It is possible that you could transition blocks of your business (perhaps your B and C clients or your qualified plan assets), allowing you to begin a lifestyle transition and just focus on the clients you have the closest relationships with.

In this case, you might be taking on a partner in your practice who will be your successor and you have a formal, written agreement in place that allows for gradual purchases of the business. This should ideally be done several years before, with agreements and timelines in place, that allows the partner to become acclimated within the practice, build relationships with the clients, and increase the likelihood that clients would remain with the practice – reducing what is called Transition Risk. Succession planning could allow you to wind down your daily involvement in the operational aspects of the practice and have a gentle, gradual move towards practice retirement or other business endeavors.

As mentioned, pre-planning is critical, since it provides the opportunity to deliver on the long-term goals and objectives of your practice, whether for retirement or in the event of an unexpected death or disability. The longer you wait to begin the valuation of your business – and understand the factors that need to be addressed to increase your practice value – you could be faced with the need for a short sale, particularly if you did not have a continuity plan for premature death or disability. In the case of a disability or death, a short-sale of your practice may be unavoidable, creating a potential loss in value for you or your heirs. However, with enough forethought in place, you can enact a short- or long-term succession and continuation strategy that allows for a well-defined exit, time to strategically work on tightening your business, technology and staffing, and allow for a timetable that helps you maximize the equity value of your practice upon retirement.

Most established advisors should be thinking of this now, so they can run their day-to-day business with the end goal in mind. Financial advisors who are retiring or nearing retirement generally have to double-step to assess and gain whatever equity value they can in their practice to make up for lost time. For many of these retirees, the transition process is started too late, leaving them with a lost opportunity to make changes in their practice that could have increased their practice value. These changes could include integration of better client relationship management technology (CRM), changes in how compensation is taken (i.e. recurring fees and revenues vs. upfront commissions or compensation), proper use of staff, comprehensive financial planning, ongoing client cultivation and relationship marketing and other factors. An advisor should ideally have at least seven to ten years before a transition occurs to have all the moving parts working in proper alignment – preferably longer. The earlier you begin considering the factors involved in valuation and transition, the better position you can be in to realize the future value of your practice, have a buyer or successor in place, and have the chance to correct the deficiencies in your business that have an effect on your practice value.

Valuing Your Practice

Proper practice valuation should not simply be done by looking at your income statements or AUM. Valuation is a sophisticated process that represents the due diligence a buyer would conduct if they were to purchase your practice. Your practice may have $75 million plus in AUM or significant fee-for-planning revenues, but that is not the sole driver a buyer or a valuation professional will look at.

For most financial advisors, determining the value of your practice is not just about establishing a simple dollar price for the practice. It involves the following:

  • What is the revenue and cash flow that the practice generates, and what has it been the last 5 years plus?
  • What is the product mix and is it diversified? Is it all annuities or mutual funds with upfront commissions and no trails or is there a balance with products that provide a predictable, recurring revenue stream from the AUM for a buyer?
  • What % of the assets are coming from your A clients, B clients and C clients, respectively and separately? If only 10 A clients are producing 90% of the revenue, the transition risk is high for a buyer – particularly if not all of those clients come over or remain with the practice.
  • What is the average age of the top 10% of your revenue-producing clients? The age of your Bs and Cs? If the clients are all over age 70, then your AUM could be a depreciating asset, which may not be preferred by the buyer.
  • Are your clients in a CRM that can be mined by age, product, and other demographics – and easily utilized to electronically transfer the book from the seller to the buyer for communication and cultivation marketing? If not, then a buyer cannot readily assess the value of the practice or retain and market to these clients.
  • Is there a long-term staff member who is core to serving and retaining your clients who would go with the buyer for transition support, if the buyer desires?
  • What marketing and client cultivation activities do you employ to retain and foster client relationships and how much are you spending on these programs?
  • How are you branding your business? If the business is branded by your last name, would clients be able to identify with someone new taking over?

The biggest drivers in valuing a practice are the recurring revenues generated from the practice, the propensity for those revenues to continue and grow with a new buyer or equity partner, and most importantly, the likelihood that those client relationships will transfer and stay with the successor. All of these factors should be carefully measured by a valuation company and benchmarked against other practices of similar size and make-up across the country.

Next month, in Part II: Proper practice-valuation

The concepts and content discussed in this article are meant to be educational in nature and are not to serve as specific business, financial, tax, legal or regulatory guidance. Individuals are advised to seek the counsel of such licensed professionals. Advantus Marketing and Weylman Consulting Group are independent entities and are independently responsible for their own respective lines of business and activities.