If you’ve convinced your clients that the primary service you provide for them is the management of their investments, you’re devaluing your business.
We live in an era where most investment flows are directed into passive investments, yet there are still far too many advisers who believe that the only value they bring is superior portfolio management.
Frankly, I don’t understand this.
If most professional money managers can’t outperform the indexes, neither can advisers and financial planners. And aside the question of whether this sort of active management provides any real value to a client, even if it is accretive and delivers alpha, it absolutely reduces the value of the firm.
Several weeks back, I was having a conversation with an adviser who was considering selling. He was in his early 60s and was evaluating his options for developing some sort of succession plan. Ideally, he told me, he’d like to sell the majority of his practice to secure his finances and then slowly transition into retirement to spend more time with his family.
As we spoke, this adviser went into great detail about the methodologies he uses to manage assets. And while he was emphatic that he was not a market timer, he admitted to continually shifting large positions from equities to fixed income, from growth to value, and so on.
This adviser also makes it a point to frequently tout his investing prowess to his clients and provides them with detailed market updates and quarterly reports.
It quickly became apparent that the perceived value of his RIA is heavily dependent upon his supposedly superior ability to pick stocks and manage client portfolios.
The issue he’s unwittingly created for himself is how to develop a succession plan. You see, if the recurring revenues generated by his practice were based upon transferrable, repeatable financial planning and elite customer service disciplines, one could easily build a case that this sort of client deliverable could be handled by another financial adviser or acquiring firm.
The problem is that in his clients’ eyes, he alone, along with his ability to outsmart the markets, comprises the value of his firm.
Still, this adviser wants to slowly transition into retirement.
The challenge is that because he can’t move to a more passive investment strategy now, how will a purchasing entity be able to integrate his firm into a more traditional practice, given what his clients perceive as his value?
We’ve spent the last several years heavily involved in M&A, and so I can tell you with great confidence that he won’t receive anything close to a maximum selling price so long as he holds on to an investment and practice management philosophy that almost solely relies upon his ability to pick stocks. Any acquiring firm will look at his practice as high risk in the areas of potential portfolio losses and client attrition, and subsequently reduce the price it is willing to pay.
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.