Will My Practice Have A Higher Valuation In The RIA Model?

Will the marketplace assign a higher valuation to your practice in the RIA model?
While there are multiple variables that go into a valuation calculation, there are some basic economic truths involved.
Consider an analogy.
You own a house and desire to sell it. Naturally, you’d like the highest price you can get for it.
Imagine if you lived in an HOA community and the HOA got to dictate how your sale process will occur, under what terms you can sell the house, who the potential buyers can be, etc.
Will that result in the highest valuation?
Or perhaps your community doesn’t have an HOA, but hypothetically the only eligible buyers of your house must come from within your neighborhood itself.
Will that result in the highest valuation?
You might find both scenarios preposterous. But that is the equivalent reality many advisors face, due to the affiliation model they’re in, when trying to derive value from their practice at the end of their careers.
In this episode of the Transition To RIA question & answer series I address some of the variables of why a practice valuation is higher in the RIA model.
Come take a look!
I'm Brad Wales with Transition To RIA (TransitionToRIA.com). This is episode #105 of my question and answer series where I answer RIA related questions I get from advisors just like you.
What I do: At Transition To RIA I help financial advisors understand everything there is to know about WHY and HOW to transition their practice to the Registered Investment Advisor (RIA) model.
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Will my practice have a higher valuation in the RIA model? That is today's question on the Transition To RIA question & answer series. It is episode #105.
Hi, I'm Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition to the RIA model.
If you're not already there, head to TransitionToRIA.com where you’ll all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA model.
Again, TransitionToRIA.com.
On today's episode, we're going to talk about if you were to move into the RIA model would your practice have a higher valuation for at the end of your career when you're looking for your liquidity event.
When having conversations with advisors that are looking into the RIA model, I often ask, “what are your motivations for looking at this? Let's make sure you have the right motivations. Let's make sure the RIA model would satisfy whatever those motivations are.”
No matter how it's phrased or how it's articulated, those answers generally fall into one of two buckets, with advisors often seeking them both.
It's usually a desire for more flexibility with how they can run their practice, the services they can provide for their clients, the investment solutions they can use, those sorts of things.
The other bucket is economics. That is current-day income, versus whatever affiliation model or firm you're at now is. And then also the enterprise value of your practice down the road at the end of your career. Which even if that’s a ways off you want to be thinking about it because this is your life's work. You're putting all these years, possibly decades, of your time and effort, you want to be able to get the most value for everything you've built. And so another motivation for the RIA model, again on the economic front, is a higher valuation.
What we’re going to talk about on today’s episode is why practices typically have a higher valuation in the RIA model.
First, just by nature of you maybe transitioning your practice into the RIA model, you're either predominantly, if not entirely, fee-based. Now as I've said multiple times - and this is a common misunderstanding - you do not have to be 100% fee-based to go into the RIA model.
There are ways to accommodate, often thought of as, legacy commission business. Maybe you're not desiring to do new commission business, but perhaps you are sitting on a fair amount of often the case variable annuities that makes sense for the client to stay in those positions. Those positions are paying you a trail. Con't....
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