With a significant number of advisors, roughly 37%¹, positioned to retire within the next decade, the value of one’s financial practice should be top of mind. For many financial advisors, the success of their personal retirement is closely tied to the value of their financial practice, as they envision financing their retirement through the sale of their book of business. Despite the perception of a thriving “seller’s market,” the current dynamic landscape of financial advisory services necessitates advisors to continually seek out business strategies that enhance their enterprise value and maintain their competitiveness. An increasingly prominent strategy in this regard is the outsourcing of specific services and platform needs.

Outsourcing, in essence, involves delegating particular tasks or functions to external service providers instead of managing them in-house. Financial advisory firms can opt to outsource diverse activities, such as investment management, IT services, back-office operations, compliance management, and marketing initiatives. While the idea of introducing another vendor or technology into an already complex operational structure might seem overwhelming, contemporary platforms and services seamlessly integrate with established practice operating systems, augmenting overall efficiency. An outsourced approach enables advisors to concentrate on their core competencies, like prospecting and servicing clients, by leveraging specialized expertise and cost-effective solutions in other areas of their practice. Moreover, from an enterprise value perspective, outsourced solutions can be more appealing to potential buyers due to the transferability of skills and knowledge and the consolidation of duplicative efforts or vendors. All in all, this has the potential to elevate the overall sale price.

Prioritizing Client Relationships. Outsourcing non-core functions empowers financial advisors to redirect their focus towards cultivating and sustaining client relationships. By alleviating administrative burdens, advisors gain more time to understand clients’ financial goals, offer personalized advice, and foster long-term relationships. This heightened concentration on client satisfaction not only bolsters client retention but also attracts new business through positive referrals. By allowing advisors to remain dedicated to client growth and service, a larger and more loyal client base is cultivated, contributing significantly to the overall enterprise value during a potential sale.

Independence and transferability are more valuable. When evaluating the true enterprise value of a financial advisory practice, the level of independence is a crucial factor. While a common estimate suggests a book’s worth as 1-3 times gross revenue, the higher end of this range is applicable to truly independent models, while advisors affiliated with wirehouses or lacking true ownership of their books should consider the lower end to be their benchmark. Buyers also scrutinize factors such as future expected earnings, probability of client retention, revenue source (fee or commission), and the source and location of clients. Some valuation factors may differ from an advisor’s intuitive expectations. The source of growth is an important factor. Organic growth is considered a more sustainable and controlled form of expansion, as it evolves from the firm’s existing business and does not rely on external influences. It is also believed to be built on stronger client relationships, therefore making those clients “stickier”. However, upon the sale of a practice, creating trust from the existing advisor to the purchasing advisor will be much more important with a book built on organic growth, as the relationship with the advisor is likely critical to the business. Further consideration must be given to whether the growth of a practice built on an advisor’s natural market is a growth rate which is transferable to the buyer. Regardless of what an advisor’s current practice structure looks like, the key takeaway is to start as early as possible in the evaluation process. If the eventual sale of the practice is envisioned as a means to fund retirement, then analyzing and building the business in the most attractive and lucrative way from a buyer’s perspective as early as possible will yield the highest possible return on your business.

Strategic Outsourcing for Growth. Outsourcing specific services and platform needs is a smart strategic move for financial advisory businesses seeking to enhance their enterprise value. The appeal lies in cost efficiency, scalability, access to specialized expertise, and an improved focus on client relationships. Furthermore, when services are outsourced they become immediately transferable to the buyer and their practice. That transferability offers a few advantages to the buyer, namely ease of transition, reduced dependency, scalability, and access to specialized expertise. Outsourced services are structured in a way that facilitates a smooth transition to the buyer’s environment. Whether it’s IT support, customer service, or investment expertise, the outsourced service provider typically ensures that the necessary infrastructure, processes, and knowledge transfer are in place for seamless integration to the buyer. By outsourcing services, the seller’s business has a reduced dependency on internal resources and expertise. This means that the buyer does not have an immediate need to invest heavily in developing specialized skills or maintaining infrastructure for those specific services. Instead, they can rely on the expertise of the outsourcing partner, freeing up internal resources for core business activities. Outsourced services are designed to be scalable, allowing the buyer to easily adjust the level of service based on fluctuating demand or changing business needs. This scalability ensures that the buyer can rapidly expand or contract their operations without incurring significant overhead costs or disruptions.

The subsequent articles in this series will delve into the impact on enterprise value of outsourcing various aspects of the financial advisor’s practice such as investment management and operations/ information technology.

¹ The Carson Group, Complete Guide to Selling Your Financial Advisory Business, April 25, 2023

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