Understand what drives your value and learn how to maximize it.

What Drives Practice Value

June 21, 2018

LPL Financial

Whether you’re looking to grow organically or through acquisition, it’s critical to understand what drives your value. Learn what activities drive long-term practice value, when it makes sense to outsource non-core functions, and how to access the broad resources and specialized support you need to pursue your growth goals.

You and everyone in your office need to routinely focus on those practices that drive value rather than subtract from it.

Learn How to Maximize Your Practice Value

You work hard to show your clients value—to help them reach their goals and reap the benefits of the advice you provide.

What about your ultimate goals and the value of the practice you’ve built? It can feel a little ambiguous to try to assign a value to your book of business, like you might a stock or a home. How you view value—and work actively to influence it—should play a big role in your strategic planning and your plan for growth.

Knowing your business means knowing your numbers. But placing an objective value on your book of business—the long-standing relationships with clients who look to you for help in pursuing their goals—can be a bit tricky. The earlier you learn that value and can begin to maximize it, the greater your growth potential. That’s the key finding in our 2018 Advisor Benchmarking and Practice Management Study, which focused on what some of LPL’s most successful advisors are doing to grow the value of their practices.

Seeing the Whole Picture

A valuation is the estimated sale price of your practice. The challenge comes in calculating that price. Many analysts will start by crunching revenue, profits, and expenses, but those are only a few factors that go into a business’s overall value. If that’s the only lens you’re using, you will likely get a skewed result.

Value is driven by future potential—where your business is heading over the next five years or more—not just year-to-year growth and portfolio performance. A true valuation takes a holistic look into your business and what gains you might achieve by pulling the right levers now.

Driving Your Value

So what adds up? It’s about the factors that play into the transferability of your practice and your successor’s ability to retain clients after a sale. Our Benchmarking study found many features of a practice—and specific activities—that can affect its valuation. For example:

Asset Concentration: Having just a few clients hold a heavier concentration of your firm’s assets under management could affect a sale price because of the greater risk associated with losing any of those individuals. Spreading assets across more clients eases that risk and can boost your value.

Sustainable Revenue Stream: One way to bring stability into your practice is to introduce advisory when appropriate for the client. Advisory offers an opportunity for a deeper relationship with your clients, the potential for a steady stream of revenue and scalability, and reduces some of the risk that comes with commissioned accounts. The study showed that practices with advisory in their mix realized greater revenue growth and the potential for higher valuations.

Technology: As practices begin to move towards an Advisory focused business model, access to technology that facilitates the transition from brokerage to advisory platforms and provides consistent reporting to clients, can streamline operations and add value.

Succession Planning: Even if you don’t have immediate plans to sell, what if something happens? Having a plan for when you leave the business—for whatever reason—counts toward stability. A potential buyer wants your clients to have multiple and consistent relationships in the office to ease the impact of your departure. Even the name on your door could play into value, since institutional branding is easier to maintain after a sale.

Acquisitions: Our survey found that acquiring other practices is one of the fastest and most reliable ways to cultivate greater value. Acquisitions give you access to new customers, higher sales, new distribution channels, and ultimately higher profits.

Outsourcing: Outsourcing routine tasks such as human resources, technology, and research allows you to focus on what you do best: serving your clients and driving revenue.

The aspects of an advisor’s business that build the most value are influenced mightily by the industry climate, its direction, and the evolving needs of investors. Knowing your value and understanding how you can influence it will help you focus your time and energy on maximizing that value. Engaging in such best practices can leave your business in a strong position for success today and well into the future.

For more on information on what you can do to maximize the value of your business, download our white paper, 3 Strategies to Help Grow Your Practice’s Value.

When to Sell a Practice

Learn best practices to monitor and maximize the value and marketability of your financial advisory practice.

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3 Strategies to Help Grow Your Practice’s Value

Learn what top advisors are doing now to manage their operations, strengthen their relationships, and lock-in future value.

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METHODOLOGY

The 2018 Advisor Benchmarking and Practice Management Study is a compilation of existing LPL data sets and is largely generated from a survey conducted in 2017 with the input of 716 LPL advisors. The advisors shared insights pertaining to practice design, office management, client service, business development, and forward-looking strategy. Details of the survey include:

Advisor participation: 2,214 advisors received an invitation to the written survey. Of these advisors,

  • 716 completed the survey, a 32% participation rate.
  • Average age: 54
  • Gender: Ninety percent of respondents were male and ten percent were female.
  • 2016 average revenue: Participating advisors had average revenue of $665,800.
  • 2016 average return on assets: Participating advisors had an average return on assets of 0.79% (calculated as 2016 average revenue divided by 2016 average AUM).
  • Data aggregation: Survey results were entered into a database for review and statistically aggregated by LPL business analysts. Both medians and averages were examined in the analysis of study findings. Due to the size of the sample, distributions were not heavily skewed. Averages were more reflective of study findings and therefore used for reporting.
  • All individual advisor information provided in the study is strictly confidential. Data gathered has been aggregated and consolidated strictly for reporting purposes.

Advisors should only recommend an advisory account if it is suitable for the client. Advisory accounts may not be appropriate for every client. Advisors need to understand that advisory relationships involve a higher standard of care than brokerage and typically require an ongoing duty to provide advice and monitoring.