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#FASuccess Ep 008: David Grau On Maximizing The Valuation Of A Financial Advisor’s Book, Practice, Or Business

February 21, 2017 07:00 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back for the eighth episode of the Financial Advisor Success podcast!

This week’s guest is David Grau Sr. David is not a financial advisor himself, but over the past 20 years his business, FP Transitions, has facilitated the sale of nearly 1,500 advisory firms, and valued almost 9,000 of them. Which means David brings an incredibly unique perspective to the evolution of buying and selling independent advisory firms, having had a front-row seat over the past two decades.

In this podcast episode, David shares the four different types of advisor ownership structures – books, practices, businesses, and firms – what characterizes each, how they’re typically valued, and what kinds of acquirers are interested in one type versus another. We also explore how to grow ownership from one stage to the next, and the classic pitfalls along the way – for instance, why the industry-standard revenue-based compensation is actually prohibitive of transforming a practice into a true business.

You’ll also hear about how advisory firm deals are typically structured today (and how it’s changed from 10 and 20 years ago), valuation trends with the looming seller wave of Baby Boomer advisors, the best way to find the right prospective buyer if you’re looking to sell now (or soon), and how the growing availability of bank financing is changing the way advisory firms are bought, sold, and valued.

And be certain to listen to the end, where David talks about why most advisors should be very wary of relying on their broker-dealer or custodian platforms to facilitate a sale, and how to spot the “predatory buyers” that are often lurking within those platforms.

So whether you’re a financial advisor getting ready to sell your advisory firm, just thinking about how to maximize the value for the future, or are a newer advisor who wants perspective on the dynamics of buying into an advisory firm, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

FP Transitions And The Kelley Blue Book Valuation Of An Advisory Firm

February 20, 2017 07:00 am 7 Comments CATEGORY: Practice Management

An independent financial advisory firm can have significant value, even if the business doesn’t have any physical or intellectual property to yield profits. Because the reality is that with annually recurring revenue and 95%+ client retention rates, there really is income-producing value in an advisory firm, even if it’s mostly based on the “goodwill” of clients to stick around year after year.

However, valuing a business whose primary assets is intangible goodwill can be challenging, especially given that the overwhelming majority of independent advisory firms are small/solo practices that generate little net profit beyond the healthy income paid to the advisor-owner to operate the business. As a result, the traditional Discounted Cash Flow (DCF) approach to valuing most businesses tends to break down (and undervalue) a “small” advisory firm (e.g., those with <$1M of revenue).

For such hard-to-value assets, an alternative approach to valuation is simply to look at the prices being set by buyers and sellers in the actual marketplace, and to simply value the business relative to its marketplace comparables. In fact, sometimes digging further into the piecemeal value of the business isn’t even relevant, just as no one values a car by disassembling it to value and then add up all the component parts; instead, for nearly 100 years, they’ve just looked up the going market value in the Kelley Blue Book instead.

In the context of advisory firms, the leading “Kelley Blue Book” solution for valuation is FP Transitions and its “Comprehensive Valuation Report” (CVR), which uses their comparables database of more than 1,500 advisory firms bought and sold in the past 20 years to estimate the value, after making reasonable adjustments for transition risk, cash flow quality, market demand, and the payment terms of the transaction itself.

Unfortunately, the FP Transitions CVR valuation estimate isn’t quite as cheap and accessible as buying the Kelley Blue Book – due to the harder-to-value aspects like transition risk and cash flow quality that must still be considered – but nonetheless, at $1,200, it makes getting a reasonable valuation accessible for the vast majority of independent advisory firms. In fact, a growing number of firms get regular valuation updates every year or two, just to understand how the value of their firm is changing, and whether/how they should make changes to further enhance the value.

Ultimately, the largest advisory firms that have greater complexity may still want to rely on custom valuations using the DCF approach, and a growing number of online valuation tools for advisory firms are starting to crop up to compete as well. Nonetheless, it’s hard to argue with going right to the source, and getting a valuation from FP Transitions using their actual (albeit proprietary) database of over 1,500 completed advisory firm transactions.

Weekend Reading for Financial Planners (Feb 18-19)

February 17, 2017 02:54 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a 2-part series from Bob Veres, exploring all the various technology solutions that have emerged in recent months specifically to help advisors comply with various aspects of the DoL fiduciary rule, from workflows for transitioning clients to level fee fiduciary engagements to benchmarking tools to evaluate the "reasonableness" of the advisor's fee and to conduct due diligence on the client's existing 401(k) plan (and the performance and costs of all its investment options).

From there, we have several financial advisor marketing articles, including: how to "repurpose" content to leverage your time doing blogging and social media as a financial advisor; how to rethink client appreciation events as "client connection events" to drive more engagement and referrals; when it's time to consider revisiting your advisory firm's brand; and why at least some types of private client lawyers can be especially good as center-of-influence referrers of high-net-worth clientele.

There are also a couple of practice management articles this week, from alternative strategies to finding advisory firms to acquire (beyond just waiting for advisors to retire), why regulators are actually pushing back on the industry's transition from AUM to retainer fees, and the various ways that "generic" business advice really does not fit the typical advisory firm.

We wrap up with three interesting articles about personal success and productivity: the first is a look at how you can divide your activities of the day/week/month/year into those that give you energy, and those that take away, recognizing that one of the biggest ways to boost your productivity is to adjust the balance in a way that increases your net energy (and yes, I can attest this really works!); the second provides tips on how you can break through if you're finding that your advisory business has plateaued; and the last is a look at how if you really want to make positive changes for yourself, it's better to think not in terms of setting goals but creating new systems and habits for yourself that allow your goals to be achieved.

Enjoy the "light" reading!

Why Series 7 Brokers Legally CAN’T Be Client Fiduciaries Without DoL Fiduciary

February 16, 2017 08:46 am 32 Comments CATEGORY: Regulation & Compliance

Periscope Office Hours Cover Image Feb 14 2017 Why You CAN’T Be A Full Fiduciary To Your Client With A Series 7 License

With the flurry of activity and attention surrounding the Department of Labor's fiduciary rule and whether it will be delayed or not, there has been a dramatic increase in media coverage around what it means to be a fiduciary, and a push for consumers to seek out RIAs over those who work at broker-dealers. Despite the fact that most advisors, at both RIAs and broker-dealers, are trying to do the right thing for their clients.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why being a fiduciary matters, and why Series 7 licensees technically CAN'T be full fiduciaries to their clients without the DoL fiduciary rule.

The key issue is that the Series 7 exam is technically the "General Securities Representative Examination". This name is important, because it indicates that ultimately, the licensee is acting as a representative of the broker-dealer. In other words, a Series 7 license allows an individual to represent the broker-dealer in the sale of securities products to clients. This is why Series 7 licensees are referred to as "Registered Representatives" of a particular broker-dealer.

And as a representative of the broker-dealer, the broker technically has an obligation to serve the broker-dealer, not the client. This is why a broker-dealer can terminate a broker for outside business activity, or for soliciting a client to move with them to a new broker-dealer. In fact, technically the client isn't even a client of the broker's; it's a client of the broker-dealer's, and the broker is just the sales representative. That's why it's illegal for the broker to take any client information when changing broker-dealers!

Of course, in today's environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working under a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is not a fiduciary, but a sales representative! Notably, these advisors are fiduciaries when they give under the RIA and are paid an advisory fee. But they are still effectively wearing two hats, and cannot be full fiduciaries while the Series 7 hat is on!

And the reason all this matters is because, if someone wants to take money from their clients by selling high-commission products to anyone they can, the suitability standard that applies to brokers is a relatively low caveat-emptor bar. But a fiduciary standard doesn't legally permit such behavior. That's why it matters - it's not about the already-good advisors who are doing the right thing, but about raising the bar to reduce the risk of bad brokers who try to do the worst they (legally) can. Which is why the focus on fiduciaries vs non-fiduciaries has morphed into a discussion of RIAs vs broker-dealers. Because the "easiest" way for the media to recommend avoiding a bad non-fiduciary (broker) is simply to recommend avoiding all of them.

The bottom line, though, is to recognize that Series 7 licensees are legally sales representatives. And if you don't like being treated as a salesperson, (re-)consider how your business is structured! Although ironically, if the DoL fiduciary rule does not get delayed, it may all soon be a moot point - as everyone working with retirement investors will be subject to the same fiduciary duty, regardless of their current business model! Ultimately, though, until brokers either voluntarily move to a new business model or are held to new DoL fiduciary standards, the reality will remain that you can't be a full fiduciary with a Series 7 license!

The Real Reason Big Savers Retire Early: Minimizing Retirement Savings Needs

February 15, 2017 07:02 am 17 Comments CATEGORY: Retirement Planning

The standard advice in saving for retirement is rather straightforward: save as much as you can, starting as early as you can, to maximize the amount of your savings and how long it has to grow. The more you can get into the retirement account, and the longer that you can let it compound, the more affordable it will be to retire.

However, the reality is that trying to increase savings actually has a dual positive effect on reaching retirement: not only does it mean there’s more in the account to grow, but saving more reduces your retirement savings need. The reason, simply put, is that for any given level of income, the more you save, the less you’re spending to live on – and if you don’t spend as much to maintain your lifestyle, you don’t need as much saved up to replace it!

In fact, the impact of increased savings (and the associated reduction in spending) can actually go a long way to help bridge the gap for retirement, especially for late-stage savers. On the other hand, for those who are still younger, strategies that help to maintain (but not substantially increase lifestyle), and let future raises be directed towards savings instead, can dramatically accelerate the path towards early retirement as well by controlling the retirement savings need. In the extreme, highly frugal living allows for extreme early retirement, precisely because it facilitates both substantial savings, and doesn't necessitate much to achieve financial independence given that very frugality.

The bottom line, though, is simply to recognize that the reason big savers who live modestly are more able to retire is not just because of the savings itself, but the fact that a moderate spending lifestyle can dramatically reduce retirement savings needs in the first place!

#FASuccess Ep 007: Matthew Jarvis On Building a Highly Profitable Lifestyle Practice by Age 35

February 14, 2017 07:01 am 52 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back for the seventh episode of the Financial Advisor Success podcast!

This week’s guest is a bit different from those we’ve had on the podcast in the past – because he reached out to me to share his story. And it’s a pretty incredible one.

Matthew Jarvis is the founder of his eponymous firm Jarvis Financial, based in Washington state. He manages over $100M of AUM for about 150 retirees, providing both investment management and financial planning services, with the support of a three-person team.

But what makes Matthew unique is that he has so systematized his firm and the services he provides to his clients, that he’s able to support all 150 clients while also taking over 80 days of vacation every year, and still maintain a more-than-50% profit margin! In essence, Matthew runs a hyper-efficient lifestyle practice. Oh, and he’s only 35 years old!

In this episode, Matt talks about how he bought out and transformed what had been a relatively stagnant and struggling firm in the midst of the financial crisis, into what the business is today, sharing how he views his business’ key metrics, how he structures the service model, and the internal staff and technology infrastructure he has created that allows him to take off all the time he wants to be with his family.

And be certain to listen to the end, where Matthew shares his strategy for “time blocking” to maximize his personal productivity, and the business development training course he took that has helped him to steadily add 10-20 new clients every year for the past four years.

So whether you’re struggling with efficiency in your own advisory firm and trying to find a better work/life balance, or you’re proactively building a “lifestyle practice” and want ideas of how to do it better, I hope you enjoy this latest episode of the Financial Advisor Success podcast with Matthew Jarvis!