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Introduction | 2
As always, we welcome your questions, comments and friendly debate!
Contact us:
Brent Brodeski, Savant Capital Management; Matt Cooper, Beacon Pointe;
bbrodeski@savantcapital.com mcooper@bpadvisors.com
John Burns, Exencial Wealth Advisors; John Furey, Advisor Growth Strategies;
jburns@exencialwealth.com jfurey@advisorgrowthllc.com
Ron Carson, Carson Wealth Management; Neal Simon, Highline Wealth Management;
rcarson@carsonwealth.com nsimon@highlinewealth.com
Jeff Concepcion, Stratos Wealth Partners;
jconcepcion@stratoswp.com
firm’s ability to generate cash flow in Given this construct, advisors can
the future from recurring fees charged maximize the value of their business by
for wealth management and investment increasing cash flow as a percentage of
Figure 1 management services. total revenue, increasing their growth rate
and reducing risk to future cash flow of
Given that buyers are seeking to predict their business. Sounds simple in concept,
how much to pay for goodwill, they but it is challenging for most advisors
will seek to understand the underlying in practice.
business drivers of value (see Figure 1).
“Nowadays people know the Brent Brodeski, President of Savant
1. Cash flow (CF) Capital Management, notes, “We feel
price of everything and the Cash flow represents the profitability we have a best-in-class growth rate
value of nothing.” of an advisory firm. Cash flow is usually
(16% without changes in asset values),
Oscar Wilde measured by earnings before owner’s
compensation (EBOC); earnings but growth is not enough to drive
before interest, taxes, depreciation and business value. We have done quite a bit
amortization (EBITDA); or a variant of work to limit the future risk to cash
of this. Advisors who want to maximize flow by diversifying our business lines,
value seek to grow cash flow at a high implementing a team-based approach to
annual rate, maximize operating leverage
the client experience and pushing down
and provide consistent returns to owners.
relationship management responsibilities
2. Growth (G) from owners to the team. If a key advisor
Growth represents the rate of organic or staff left the firm, our expectation
growth of an advisor’s business. Usually is the impact to revenue and cash flow
the best proxy for growth is net new would be minimal.”
revenue – client additions less client
attrition. In the past, market growth was
able to mask potential deficiencies in
growth, but that may not be the case in
the present and the future. Growth from
mergers and acquisitions may or may not
be included as a growth driver.
Figure 2
Cons Does not account for Does not seek to Most complicated method
expense model forecast future cash Difficult to predict
Does not predict cash flows, although could future cash flows given
flow of future owner be viewed as a proxy market cycles
Highest risk for buyers Post-transaction revenue Limited socialization
and expenses could vary in RIA and IBD space
and impact cash flow
Figure 3
relative premiums or discounts are taken firms in the industry were appraised. The
to derive a market-based valuation. challenge with market comparables is
A great deal of time is focused on just that purchases and sales for independent
the multiple, but more time needs to advisory firms are private. Even if the
be spent to understand what is driving price becomes public, the terms of the
the multiple. transaction are opaque.
There are several common ways to value For example, an independent advisory
professional services businesses. The firm could be sold for what is perceived
common methods within the independent as a premium, but if the transaction
advisory space are described in Figure 3. included very little cash up front from the
buyer and future installments tied to an
In addition to these quantitative methods,
earn-out that has growth provisions, the
most appraisals will also include a
outcome to the seller is quite uncertain.
market comparables aspect that shows
This is why a market comparables
the user of the appraisal how similar
Conclusion | 12
advisors are facing in terms of managing Howie feels that independent advisors
Beacon Pointe business equity. Firms that can show who lack scale may want to consider
Advisor Experience the following three attributes usually get finding a larger entity to join forces with.
a premium over other firms: “I came from a place where I wanted to
control everything. I quickly realized that
Scale is a premium rewarded to firms
that can show operating leverage and Beacon took over areas of my business I
margin expansion. didn’t need or want to have my hands in.”
Organic growth rate is one of the top Howie also came to the conclusion that
attributes that drive the future value BPWA provides certainty to managing his
of cash flow.
business equity, given that BPWA has a
Size matters. Larger firms command
buy/sell agreement embedded in their
larger valuation multiples and drive
lower discount rates for risk. operating agreement in case of an
unforeseen event or when an affiliated
Cooper notes, “Many advisory firms have advisor exits the business. Howie notes,
long-term exposure to risk in their “The value of an advisor’s business is
Figure 5
businesses that they are not realizing at in huge jeopardy without a detailed
this point, given their businesses are succession or continuity plan. I can now
delivering a nice take-home pay each and explain to my clients, my family and
every year. These advisors will eventually prospects what happens if something
come to the realization they are extracting happens to me. Having Beacon Pointe
the enterprise value year in and year out, behind me puts minds at ease.”
and there may not be much of a residual
value when they exit the business. The
market has become more sophisticated;
there are no dumb buyers that are willing
to pay premiums.”
Case Study | 13
Acknowledgements About aRIA About Weitz Funds
aRIA, the alliance for RIAs, is a think Wallace R. Weitz & Company was
tank study group composed of six elite started in 1983 with about $11 million
RIA firms that collectively manage under management. Over the years, the
more than $20 billion in client assets, firm has followed a common-sense
and Advisor Growth Strategies, a leading formula: own a group of strong businesses
consulting firm serving the wealth with deeply discounted stock prices.
management industry. The group offers By staying true to this philosophy – and
insight for advisors considering ways to sticking to industries it understands –
enhance their firms’ enterprise value. Weitz Funds has been able to pursue
Members include Brent Brodeski, CEO of solid returns for investors. Today, the
Savant Capital; John Burns, Principal at firm, a registered investment advisor,
Exencial Wealth Advisors; Ron Carson, manages approximately $4.4 billion
CEO of Carson Wealth Management for the Weitz Funds, individuals,
Group; Jeff Concepcion, CEO of Stratos corporations, pension plans, foundations
Wealth Partners; Matt Cooper, President and endowments. Learn more about
of Beacon Pointe Advisors; Neal Simon, Weitz Funds at www.weitzfunds.com
CEO of Highline Wealth Management;
This white paper was sponsored
and John Furey, Principal of Advisor
by Weitz Funds.
Growth Strategies, LLC. The group meets
regularly, releasing thought leadership
pieces of interest to both independent and
wirehouse advisors interested in exploring
long-term growth strategies. On the Web
at: www.allianceforrias.com
About Advisor
Growth Strategies
Advisor Growth Strategies, LLC (AGS)
is a leading consulting firm serving the
wealth management industry. AGS
provides customized business
management solutions for independent
firms seeking to aggressively grow their
business and for financial advisors in
transition. Our services include strategic
planning, recruiting and acquisition
programming; compensation design;
and succession planning. We serve
established independent advisors,
large breakaway advisor teams and
institutional-level corporations. On the
Web at: www.advisorgrowthllc.com
Acknowledgements | 14