How to Increase RIA Valuation: 12 Best Practices

Increasing your RIA’s valuation goes beyond simply revenue. Your firm’s foundation must be rock solid, yet flexible to change and able to adapt.

These are some of the best times to be an established and successful Registered Investment Advisory firm, with RIA valuations up significantly.

A Fidelity report has shown interest in acquiring RIAs has skyrocketed, with M&A activity at record levels.

Despite the growing interest, many buyers have walked away, saying no to more than half of evaluated deals.

Why Have So Many Deals Fallen Through?

The Fidelity report found that among potential buyers surveyed, 87% felt valuation expectations were not aligned, 73% felt the culture (mission, values) was not a good fit, and 50% believed the firm’s vision (growth plans, client experience) did not align with their firm.

Conversely, the report found that many RIA sellers had unrealistic comparison multiples (83%), had a lack of understanding of valuation drivers (77%), and were “too close to the business to see weaknesses” (47%).

With these points in mind, RIAs interested in selling their business must have reasonable expectations for valuation multiples while simultaneously doing everything they can to increase and justify said valuation.

12 Ways to Increase RIA Valuation Multiples

1. Demonstrate Strong and Consistent Financial Performance

This is the most obvious, but still needs to be said.

Develop a solid investment strategy that delivers real returns for clients. Grow your assets under management by both investment performance and acquiring new client assets.

Point to a track record of steady growth and one that outperforms benchmarks.

And it’s not just about increasing revenue, but also cutting costs. Growing revenue requires full focus on those very activities that increase revenue.

More on those below.

2. Develop Diversified Investment Portfolios

Buyers and investors never want to put all their eggs in one basket.

Building and maintaining high-quality investment portfolios and proper allocation to assets for your clients is another point of consideration.

And when you outperform benchmarks and generate acceptable risk-adjusted returns, you will not only please and attract more clients, but RIA valuations will rightfully go up.

3. Have a Diversified, Sustainable Client Base

Client diversity takes many forms: age, client asset totals, location, gender, ethnicity, etc.

And having a diverse, well-represented client base eliminates risk and builds confidence among buyers.

What if the majority of your clients are Baby Boomers? What will happen when they pull out of the markets and cash out their investments? Without new, young prospects, your client base will evaporate.

Do you have a small number of clients  and/or rely on a few “whales” for your revenue? What happens if one client leaves? How does that impact firm finances?

As the US and other Western countries become more ethnically diverse, and as all groups will see rising levels of wealth, there are opportunities for RIAs to pursue these markets, and that diversity is highly reflected in tech-savvy millennial and Gen Z groups, both key targets for any firm that wants sustainable growth.

4. Foster Strong Client Relationships

Your clients are your revenue stream.

So, place a premium on building strong, long-lasting relationships.

Additionally, positive client testimonials and referrals will enhance your reputation and attract new clients, which, in turn, increases your AUM and valuation multiples.

5. Attract and Maintain Advisory Talent

Strong financial performance doesn’t just happen by itself.

People (and with the help of technology) make it happen.

And the number one driver of buyer  interest in mergers and acquisitions - according to Fidelity - is acquiring top advisory talent.

Patrick Lawlor, head of M&A at Illinois-based Savant Wealth Management, shared his perspective:

“When you’re at a growing firm, you constantly need good young talent, and there aren’t as many of them coming into the industry. A lot of people in our industry are going to be retiring in the next five or 10 years — that’s why there’s so much M&A going on.”

6. Ensure Leadership Continuity and a Stable Team

Of course, you want a team that’s consists of experienced and capable professionals, but everything starts at the top.

It is management that sets the tone for everyone and everything downstream.

And a management team and staff that is together longer will perform better, and that can only mean good things for RIA valuation multiples.

7. Establish an Exemplary Culture

Part of great leadership and continuity is a culture that promotes employee excellence and client-centric approaches.

The culture is also one that fosters career and personal development, and it promotes a work-hard, play-hard environment where those who do their part will be recognized and rewarded.

Culture is less tangible, but truly foundational. Without the culture, greatness does not occur, and RIA valuations will be lower.

8. Emphasize Regulatory Compliance

Maintaining strong regulatory compliance and adhering to industry standards and best practices is also part of the foundation.

A history of regulatory compliance reduces risk and improves your reputation, both of which will never hurt your RIA’s valuation.

A poor record of compliance, in contrast, will scare away clients and potential buyers. Nobody wants any part of a firm that is in the SEC’s doghouse.

Download our Automation Guide.

9. Leverage Technology, Digital-First Solutions

Buyers want to purchase forward-thinking firms, and technology is a representation of that forward-thinking approach.

Advancements in machine learning, automation, and cloud-based systems can all driver greater efficiencies in your processes.

The streamlining of work can simplify workflows and:

  • reduce turnaround times
  • save money
  • improve data and reporting accuracy
  • make it easier to access data and make more informed decisions faster
  • improve the client experience (younger clients in particular will demand digital-first solutions)

When you leverage technology to do the work for you and  most efficiently, this will surely increase RIA valuation.

10. Run a Hyper-Efficient Operation

The aforementioned Fidelity report also mentioned that the desire to reduce operating costs was the top driver of sellers’ interest in M&A activity.

So, if RIAs plan to increase their valuation multiples, they must not overlook the importance of operations; operations is the backbone of investment firms.

While the middle and back office do not generate revenue per se, a sound operation facilitates all actions that lead to revenue-generation, including client servicing, investing/trading, and high-level decision-making.

Additionally, an efficient organization has well documented procedures, making it easier and faster for employees to complete tasks without mistakes. These companies also have quality control checks, making sure data and reporting are accurate before sharing with clients.

For a more efficient operation, RIAs will leverage third-party investment manager outsourcing solutions providers.

Offloading tasks and technology needs to outsourced providers like Empaxis are great ways to cut costs and show buyers that you let the third parties do what they’re best at, and you as the RIA focus all attention doing what you’re best at.

11. Invest in Your Brand and Marketing

Marketing and branding efforts will increase your RIA’s visibility and reputation in the investment management industry.

Strong brands attract more clients and buyers, positively impacting your valuation as an RIA.

Learn More: RIA Marketing Tips for Your Website.

12. Sell the Dream

To sell the dream, and the story you tell will determine the outcome.

And there is an art to storytelling, and if you can tell a good story about your advisory firm, buyers will want it as their own.

In order to sell the dream, you have to back up the dream with substance.

Show where you started and the progress you made to get this far. Now, having built up their confidence in in you, the buyer wants to hear about the next set of goals and the steps to achieve them.

Whether it’s growing the client base,  increasing total assets under management, or hitting certain investment performance targets, potential buyers want to see you have a plan and demonstrated capability to follow through.

RIAs Deserve the Money They’re Worth

When it comes to valuation increases, RIAs have a lot they can do.

And it’s not just about the revenue streams and financial performance. At the foundational level, there are things like company culture, leadership, compliance, operations, and technology that all play huge roles in organizational efficiency and ultimately higher valuation multiples.

Even if an RIA has no (immediate) plans to sell their business, the firm still benefit from following the aforementioned best practices.

Following those 12 tips will ensure a solid foundational footing for the firm, as well as provide the flexibility and adaptability needed to thrive, and ultimately increase an RIA’s valuation.

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