Measuring Your Book of Business as a Financial Advisor

As a financial advisor, you dedicate your career to helping your clients grow their wealth and prepare for retirement. However, ensuring your retirement is on solid footing is just as important.

One effective way to bolster your retirement plan is by selling your book of business at the end of your career. Preparing a sales plan can take several years, so the sooner you start, the better. The first step is assessing the market value of your book of business.

In this article, we’ll explain how to measure your book of business to get an accurate valuation. We’ll also provide some practical tips for increasing its market value to position yourself for a more profitable sale when the time is right.

What is a Financial Advisor Book of Business?

A financial advisor’s book of business refers to their portfolio of clients and the assets they manage on their behalf. It encompasses the following components:

• Assets under management (AUM) – AUM is the total value of financial assets an advisor manages for their clients, including their stocks, bonds, mutual funds, and insurance policies. AUM is a critical factor in determining the profitability and marketability of an advisor’s book of business.
• Revenue is the income an advisor earns from managing their clients’ assets, which can be generated through commissions or fees. The stability and growth potential of an advisor’s revenue stream directly affects the value of their book of business.
• Clients – Financial advisors’ clients play a crucial role in shaping the value of their books of business. High-net-worth individuals, long-term clients, and clients with complex financial needs are particularly valuable, as they tend to offer the greatest stability and growth opportunities.

If you’re an established financial advisor, your book of business is a valuable asset, built through years of dedication, effort, and investment. That’s why advisors in earlier stages of their careers are often eager to purchase books of business – it offers them a quick and effective way to expedite their growth and expand their client base.

When Should You Evaluate Your Financial Advisor Book of Business?

You should evaluate your financial advisor book of business at least seven to ten years before you plan to retire. Advanced preparation will give you ample time to optimize its operations, maximize its sale value, and establish your succession plan.

The average age of financial advisors is currently 56 years old. If you’re around that age, you’re at the ideal stage of your career to start this process.

Even if you don’t plan to sell your practice any time soon, regular valuations are still beneficial. They can help you evaluate your business’s health, identify growth opportunities, and ensure you’re meeting your long-term financial goals. Understanding the value of your business can also help you navigate negotiations with potential partners, investors, and successors.

13 Metrics to Measure During Your Book of Business Valuation

A thorough valuation of your book of business considers many factors, including your firm’s profitability, client relationships, operational efficiency, and growth potential.

By measuring these 13 key metrics, you can gain a clearer understanding of your business’s market value:

#1 Assets Under Management

The total value of assets you manage, whether it’s $10 million or $100 million, is a key determinant of your book of business valuation. Your AUM offers prospective buyers insight into the size and scale of your practice. A steadily increasing AUM signals consistent business growth and strong, lasting client relationships, both of which can enhance the appeal of your practice to potential buyers.

#2 Revenue

Revenue is a key indicator of your practice’s profitability. High revenue reflects strong financial performance, while consistent revenue growth suggests the potential for future expansion. Flat or declining revenue, on the other hand, may signal stagnation.

Calculating revenue per client provides valuable insights into individual clients’ financial contributions. By identifying your highest-value clients, you can prioritize their accounts and adjust your marketing strategies to attract similar prospects.

#3 Client Composition

Before you can maximize your revenue per client, you need to understand the current makeup of your client base. Here are a few questions to help you do just that:

• Do you receive most of your revenue from a few high-net-worth individuals? Or is your revenue per client evenly distributed across your client base?
• What is your client turnover rate? Are certain types of clients more loyal than others?
• What do your most lucrative and loyal clients have in common? What are their typical income, net worth, age, and professions?

Your answers to these questions can clarify the composition of your client base and guide your marketing and acquisition efforts going forward.

#4 Operational Expenses

When it comes to profitability, revenue is only one side of the coin. A lavish revenue can quickly be offset by excessive operational expenses, including:

• Support staff salaries
• Technology and software
• Office rent, utilities, supplies, and equipment
• Advertising and marketing expenses
• Legal and accounting services

By streamlining these expenses as much as possible, you can boost your profit margins and increase the value of your book of business.

#5 Service Model

The structure of your service model—whether commission-based, fee-based, or a hybrid—directly impacts your book of business valuation. Here’s why:

• Commission-based – With this model, you earn commissions from selling financial products, such as insurance, mutual funds, and securities. This approach can generate significant income from individual transactions but inject more volatility into your revenue.
• Fee-based—A fee-based model involves charging clients a flat fee, hourly rate, or percentage of their AUM. This approach typically generates more consistent, predictable revenue and can reduce conflicts of interest, leading to stronger client relationships.

Since fee-based models often provide greater long-term financial stability, adopting one can make your practice more attractive to potential buyers.

#6 Suite of Services

Depending on the size and scope of your practice, you may offer a combination of the following services:

• Financial planning
• Investment management
• Insurance management
• Tax planning
• Retirement planning
• Estate planning
• Business succession planning
• Client education
• Specialized services

A robust suite of services can boost your book of business valuation since it allows for more upselling and cross-selling opportunities. Better yet, it empowers you to handle more of your clients’ needs in-house, preventing them from seeking support from a competitor.

Additionally, if you provide a comprehensive suite of services, you’ll be more likely to attract and retain high-net-worth clients, who typically have larger portfolios and more significant financial needs.

#7 Unique Value Proposition

Speaking of honing your competitive advantage, clarifying your unique value proposition (UVP) is essential. Your UVP explains what sets your practice apart from the competition, whether it’s unique service offerings, cutting-edge tech solutions, or highly specialized expertise.

A compelling UVP can bolster your book of business valuation because it shows that your business has a strong market position and competitive edge. Thus, your clients will be less likely to leave your firm, even after you sell your book of business. They may also be willing to pay more for your unique offerings.

#8 Client Retention Rate

Client retention is a crucial metric to measure during your book of business valuation. You can assess this metric by calculating your annual client retention rate or measuring your average client tenure.

Loyal, long-term clients add more value because they:

• Streamline client acquisition – Loyal clients generate a reliable revenue stream, reducing the need for constant client acquisition.
• Are more affordable – Acquiring new clients can be expensive due to the advertising, marketing, and onboarding costs involved. Retaining existing clients, on the other hand, is considerably more cost-effective.
• Support greater stability – Your loyal clients are more likely to stick with you during economic downturns, reducing your risk of asset withdrawals and account closures.
• Compound in value over time – Through your financial planning, your clients’ assets are expected to grow over time, which can increase your AUM if they choose to remain with your firm long-term.
• Generate more business opportunities – Long-term clients are more likely to refer their friends and family and take advantage of upselling and cross-selling opportunities.

#9 Client Satisfaction

If you want to optimize your retention rate, you need to strengthen your client relationships. You can evaluate the quality of your client relationships by administering surveys on a regular basis.

Make sure to include a question asking how likely your clients are to recommend you to their friends, family, and colleagues. Clients who report a high likelihood of doing so are considered “enthusiastic promoters.” These clients bring more value to your business by generating more referrals.

In addition to implementing your clients’ feedback, you can enhance their experience by developing a deep understanding of their needs and goals, communicating with them consistently, and demonstrating an ongoing commitment to their financial well-being.

#10 Operational Efficiency

Every business owner wants to optimize efficiency because it can boost productivity, reduce costs, and enhance profitability. Completing this step ahead of time for your prospective buyers can increase the value of your book of business.

One of the fastest ways to improve your operational efficiency is by implementing the latest software solutions, such as automation and artificial intelligence (AI). Some other methods include:

• Evaluating your current workflows and addressing any bottlenecks.
• Examining your employees’ roles, responsibilities, and performance.
• Identifying areas where you can cut costs without compromising service quality.

Completing these steps can demonstrate to potential buyers that you have a streamlined process in place and assure them that your business can scale up with minimal disruption.

Learn More: Leveraging AI For Financial Advisors

#11 Regulatory Compliance

Financial advising is a highly regulated industry. Failing to comply with all relevant regulations can lead to costly fines, legal penalties, and reputational damage. By demonstrating a clean compliance history, you can avoid these expensive repercussions and reduce potential buyers’ perceived risk of going through with a purchase.

#12 Location

In today’s digital age, you can attract and service clients from across the country. However, your practice’s geographic location still influences its value. That’s because you can gain a lot of valuable clients from hosting local events and networking with other professionals in your community.

If you’re located in an affluent area, you may be more likely to attract high-net-worth clients, incentivizing prospective buyers to pay a premium for your book of business.

#13 Succession Plan

The final factor to consider in valuing your book of business is your succession plan. This outlines the strategy for transferring ownership or management of your practice, including:

• The essential qualities you’re seeking in a successor
• Your proposed transition timeline
• How you’ll maintain continuity of service for your clients during the transition

Over the past few years, an increasing number of financial advisors have realized the importance of succession planning. As of 2022, 64% of advisors had a succession plan in place, compared to just 27% in 2018.

If selling your practice is a part of your succession plan, you need to ask yourself the following questions:

• How long are you willing to stay at your practice after finding a buyer?
• What level of involvement do you want during the transition period?
• Will you offer mentorship or guidance to your buyer, and if so, for how long?
• How will you ensure your clients are confident in the new owner’s capabilities?
• How will you handle the communication of the transition to your clients and staff?
• What steps are you taking to maintain the value of your book of business during the transition process?

When you have clear answers to these questions, you can ensure a smoother transition and improve the outcomes for your buyer. In turn, your succession planning can bolster your book of business valuation.

Call out: Looking for succession planning support? Alden Investment Group has you covered.

With our national network of financial advisors and business development experts, we can connect you with the fitting successor. Better yet, we can streamline the process of increasing the value of your book of business as you approach retirement.

How to Calculate Your Financial Advisor Practice Valuation

Now that you know what metrics to measure, you may be wondering how to transform them into a valuation estimate. These days, you can use many financial advisor practice valuation calculators. All you need to do is plug in a few key metrics and allow the algorithm to estimate your practice’s market value. You can also calculate the value manually using discounted cash flow (DCF), earnings multiples, or revenue multiples formulas.

If you want a more concrete estimate, you can work with a professional business valuator or trusted registered investment advisor (RIA), like Alden Investment Group. After conducting a comprehensive analysis, your consultant can offer a more accurate and nuanced valuation of your practice tailored to your specific circumstances and market conditions.

Maximize Your Book of Business Valuation With Alden Investment Group

As you can see, determining the value of your book of business is a complex and multifaceted process. By taking a proactive approach to your business valuation and succession planning, you can optimize your practice’s value and ensure you’re in a strong position when you finally retire.

With everything else you have on your plate, conducting a book of business valuation may sound like a lot of work. Fortunately, you don’t need to do it alone. If you join Alden Investment Group, our team of experts can assist at every stage, whether you want to expand your service offerings, strengthen your regulatory compliance, or set up your succession plan.

Want to learn more about our financial advisor support services? Reach out to our team today.

Sources:

Investopedia. Top Tips for Young Financial Advisors.
https://www.investopedia.com/articles/financial-advisors/101415/top-tips-young-financial-advisors.asp

Forbes. Customer Retention Versus Customer Acquisition.
https://www.forbes.com/councils/forbesbusinesscouncil/2022/12/12/customer-retention-versus-customer-acquisition/

SmartAsset. Survey Reveals Details About Financial Advisor Succession Planning.
https://smartasset.com/data-studies/financial-advisor-succession-planning-2022