How Does Your RIA’s Client Base Affect Your Firm’s Value, and What Can You Do to Improve It?

Practice Management Wealth Management

We’re often asked by clients what the range of multiples for RIAs is in the current market.  At any given time, the range can be quite wide between the least attractive firms and the most attractive firms.  The factors that affect where a firm falls within that range include the firm’s margin, scale, growth rate of new client assets, effective realized fees, personnel, geographic market, firm culture, and client demographics (among others).  In this post, we focus in on the client demographics factor, explain how buyers view client demographics and explore steps some firms are taking to reach a broader client base.

Client relationships are one of the most significant assets that RIAs possess, and maintaining and profitably servicing these client relationships is key to an RIA’s financial success.  In a transaction context, the strength of an RIA’s client relationships and the demographics of the client base can have a significant bearing on the multiple buyers will be willing to pay for the firm.  An RIA’s outlook for future asset growth can be significantly impacted based on factors such as expected client retention, which stage current clients are at in terms of wealth accumulation (are they withdrawing assets or contributing assets), and the prospect for future liquidity events within the client base.

Client relationships are one of the most significant assets that RIAs possess

Many of these factors can be proxied by the age profile of the client base.  For most RIAs, the age of the client base tends to skew older (particularly on an asset-weighted basis) simply because older clients generally have more assets.  Decades of compounding returns can create some very large accounts for older clients, and these accounts can often be profitably serviced by the RIA.  However, with an older client base, the asset base is usually declining as these individuals are withdrawing, rather than contributing, additional funds.  And, of course, the remaining life expectancy for older clients is less.  As such, the age profile of the client base is a key area of inquiry for many buyers.

Because an older average client base tends to suggest headwinds for future asset growth, an older client base is generally seen as a negative (all else equal) from a valuation perspective.  In general, the younger the client base, the better the outlook for future asset growth and the higher multiple the firm commands.  RIAs can expand their reach to a younger client demographic by increasing focus on retaining assets to the next generation and by positioning themselves to appeal to a younger client demographic.

Retaining Assets to Next Generation

In general, RIAs are not particularly successful at retaining assets to the next generation.  According to Cerulli, more than 70% of heirs are likely to fire or change financial advisors after inheriting their parents’ wealth.  However, firms that make it a priority to engage and develop relationships with next generation family members today can significantly improve asset retention once the assets are transferred from the current client to the next generation.  The earlier this is done, the better the chance at retaining assets into the next generation.

Focusing on asset retention today is particularly important, given that more than $70 trillion is expected to transfer from older generations to heirs or charities by 2042.  RIAs that can capture or retain these assets as they transfer to younger generations will have a competitive advantage against those that cannot.

Attracting Younger Clients

A Wall Street Journal article published last year highlighted the struggle many advisory firms face in attracting younger clients.  See Rich Millennials to Financial Advisers: Thanks for the Golf Invite, but You Can’t Invest My Money.  As the article suggests, many younger clients are electing to manage their own assets rather than hire a traditional financial advisor.  While DIY investment management is popular among younger clients, many see this preference as temporary.  Once these clients reach an asset or life stage threshold where their financial lives become more complicated, it’s anticipated that the need for traditional, personalized advice will increase.

While attracting younger clients can be difficult, there are several strategies RIAs can use to position themselves to capture this emerging client segment.  For one, RIAs should recognize that investment expertise is table stakes for attracting younger clients.  These clients are often looking for financial coaching and holistic financial advice that goes beyond simple asset allocation.  By offering these “soft” services in addition to traditional investment management, RIAs are better positioned to win younger clients.

RIAs should recognize that investment expertise is table stakes for attracting younger clients

RIAs can also attract younger clients by hiring younger advisers.  Anecdotally, advisers tend to attract clients that are within plus or minus ten years of their own age.  Thus, having a broader age range of advisors can unlock younger client segments (and also contribute to the stability and continuity of the firm).

RIAs can also reevaluate their marketing strategies to appeal to younger client demographics.  As the WSJ headline suggests, golf invites have fallen by the wayside for most younger clients.  While referrals and word of mouth are the traditional sources for new clients, having a strong online presence and digital marketing strategy is critical for attracting a younger client demographic.

In order to effectively service accounts for a younger client demographic, RIAs may also want to reevaluate how they determine fees for these accounts.  While the traditional percentage of AUM model works well for many clients, RIAs may find this model difficult to apply to a younger client demographic.  For individuals still in the prime of their working career, it’s not uncommon to see a significant a significant amount of their net worth tied up in privately held companies.  The value of these assets is not generally included in AUM, and thus does not generate fee revenue.  Other clients may have significant incomes and financial planning needs, but have not yet accumulated an asset base significant enough for an RIA to profitably service the account using a traditional percentage of AUM model.  Many firms that have been successful at attracting a younger client demographic are able to offer alternative pricing arrangements in order to account for situations such as these.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides asset managers, wealth managers, independent trust companies, and related investment consultancies with business valuation and financial advisory services related to shareholder transactions, buy-sell agreements, and dispute resolution.