What Influences the Value of a Financial Advisor Practice

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What Influences the Value of a Financial Advisor Practice

The value of your financial practice has tremendous influence over your ability to secure working capital and financing to grow your business through acquisitions. Understanding how your value is calculated and what influences that value is essential to improving your purchasing power if you are looking to acquire and strengthen your selling price if you are looking to sell your practice in the near future.

The value of a financial advisor practice is derived from a number of key factors. Each factor has the ability to raise or lower the financial worth of a practice. How those factors are expected to change over time can also impact the value and often become a motivation to sell, even if the seller is not yet ready to retire. The factors in question include revenue, profitability, client composition and lifetime value, and staff members.


According to Anthony Whitbeck, CFP, CLU and CEO of Advisor Legacy and Key Management Group, revenue, particularly recurring revenue, is “the number one variable that drives value.” He explains, transactional revenue is considered, but the bulk of the value is derived from recurring revenue that is predictable and consistent. In fact, recurring revenue is weighted 3 times higher than transactional revenue.


Profitability looks at the overall efficiency of a firm. Specifically, expenses in relation to revenue and the resulting profit margin. According to Whitbeck, larger firms tend to have high operating expenses, and thus lower margins. In terms of valuing a business, profitability is referred to as “enterprise value” and is considered in the overall calculation of value. High operating costs are not necessarily a term of purchase and may not be included in the assets and liabilities assumed by the buyer.

Client Composition

The types of the clients the firm serves also significantly impact the value of a book of business. First, the ratio of high value/high net worth clients (clients with $500,000 or more in assets under management) to low value clients (those with less than $100,000) impacts the value. Both the number of clients in each category and the total volume of revenue generated by each category is considered. Whitbeck notes that the most profitable firms tend to keep low-value clients to less than 25% of their total client list.

Whitbeck goes on to explain that the age of clients is also considered. “An aging client population is a risk,” he says, “especially if the firm is not engaging in generational planning.” Whitbeck says that to mitigate that risk, the selling firm should demonstrate that they have a record of engaging with spouses and descendants of aging clients and are actively building relationships and accounts with those heirs. Whitbeck adds that, “An aging client list is often a motivation to sell, even if the seller is not ready to retire and plans to continue working.”


The human capital of a firm also impacts value, both positively and negatively. A firm with a high number of clients will likely also have a high number of client-facing staff members managing those relationships. Whitbeck notes, “The cost of employment is generally the largest expense a practice encounters.” A large number of licensed professionals equals high employment costs, which impact profitability and value. Whitbeck explains that profitability is significantly and negatively impacted when the firm employs large numbers of staff to serve the lowest value clients, those with less than $100,000 in assets. The return on the added support is nominal at best. So, assessing the ratio of staff to the ratio of client accounts is critical to determining the real profitability, and thus, value of a practice.

Understanding the factors that influence a firm’s value helps a buyer assess and pre-vet potential practices. Oftentimes, sellers will disclose a certain amount of information during the “search” phase so that buyers can make an initial, no commitment offer, which helps sellers identify serious buyers and initiates the next phase in the “getting to know you” process. However, to proceed in negotiating and financing a deal, it is important to secure a third-party valuation of the business.