Blog articles that reflect our perspective

This blog is our vehicle for sharing insight into changes in the financial industry relating to advisor recruitment. We hope you find it informative and encourage you to contact us with any questions or comments regarding what you’ve read here.


By: Nate Lenz, I&A Consulting

Empathy, Sincerity, Passion, Discipline, Drive. When asked to describe my first true mentor in the wake of his untimely passing, these were the words that immediately came to mind. They came to mind not because he told me that he aspired to be those things, not because they were listed on his Linkedin profile as “Skills & Endorsements,” but because of the way he lived his life. The 5:30am training sessions in high school, his willingness to advise on a college freshman’s business plan, and the calls just to check in that you could almost set your watch to, were manifestations of core values that made him who he was. He was the epitome of the adage we commonly used on the football field, “don’t talk about it, be about it.” With standing room only in both the sanctuary and the overflow seating in the church hall, the influence he had on the lives of so many was staggering. His ability to excel in business, as an athlete, and most importantly as a father, husband, and friend was directly attributable to his unwavering discipline; a discipline that stemmed from complete clarity in the legacy he sought to leave behind.

In consulting with independent financial services firms seeking to grow their businesses by recruiting advisors or through strategic mergers and tuck-ins, we first seek to understand their vision and more importantly, their core values - their “Why.”Far too many of these firms begin our dialogue by rattling off a list of services, touting their years of experience, or my personal favorite, explaining that they have a superior “culture”. While all of those things may very well be true, culture must be felt, it cannot be explained.

If you were to look at any single aspect of your business, I can guarantee that you will find a firm that can perform that function in a superior manner. Lucky for you, people “don’t buy what you do, they buy why you do it.” The root cause of why a client works with you or why an advisor decides to join your firm is Trust. But what most firms fail to realize is that trust is not a driver, it is an outcome. Trust results from a set of shared core values permeating every level of an organization. It stems from having a disciplined approach to every client and staff interaction, with processes to ensure quality of service. This fosters Consistency. Consistency, paired with a commitment to your core values breeds Authenticity; and when you come across a client or advisor that identifies with this, there is no better builder of Trust.

So when you walk into the office this morning, whether your leading a small team or a large firm, I would challenge you to put pen to paper and write down the things that make you tick. What are your core values and the principles that you would like your team to embody? Invite your team members to do the same. When you go through this exercise I would encourage you to stay away from the canned mission statement format that tends to be pervasive in corporate America - after all, these are gut feelings and emotions that by definition are difficult to articulate. Look at this as an opportunity to build camaraderie amongst your team in an open forum, brainstorming session. I would venture to say that if your organization has achieved any level of success, the values and principles that are discussed will be eerily similar. Then make a commitment as a group to act as accountability partners, ensuring the values are upheld and principles are pursued with unrelenting consistency. Its not enough to talk about it, you have to be about it because when its all said and done, any weak link in the chain can cause a break in Trust.

Raymond James is not affiliated with I&A Consulting.

By: Scott Steele, Raymond James

As part of our advising on acquisitions, practice valuation is a core part of our offering and an area that consistently draws high interest from advisors. Even though there are numerous articles citing common valuation multiples for practices, there are many advisors that come back disappointed in the valuation number that they receive. They can’t necessarily make a great argument as to why that valuation number is low, but it just doesn’t seem like enough. It would be accurate to cite something like the endowment effect (people overvalue things that they own), as a behavioral bias for this phenomenon. But, it only tells a small part of the story; when in fact, it is a very rational conclusion. Advisors feeling that their practice is undervalued can be explained by the discount rates used to value a practice.

That isn’t to say that the discount rates used to value financial practices are too high either. The issue comes from the asymmetric information inherent in selling a relationship based business! Let’s take a step back and explain what discount rates are used for. If someone were to buy a business, they are exchanging cash today for the future cash flows of that business. But, those future cash flows are uncertain and therefore risky. To compensate an investor for that risk, they discount those future cash flows using a rate. That rate of return represents the return an investor would require given the riskiness of those future cash flows. Generally, discount rates for financial services practices range from 15% to as high as 25%. The average rate of return for small cap stocks over the past 80 years is 12.7%. Given that financial advisory practices are much smaller than the average small cap stock, less liquid, and highly regulated, it is not hard to argue for a risk premium to get to that 15% - 25% range. But, more importantly than all those factors, the advisor is selling a relationship! The intangible nature of the business adds a very serious risk to a potential buyer.

These required rates of return for potential buyers represent the riskiness of the future cash flows for themselves, not the riskiness of the cash flows for the current advisor. The current advisor has established trust with clients, knows their financial situation in-depth, and has likely been friends with those clients for years. The risk of losing their clients is limited. Their future cash flow stream is much more predictable and stable than a prospective buyer’s. Thus, the current advisor’s discount rate is much lower than a prospective advisor’s. The lower discount rate implies a higher valuation. This is why advisors rationally feel their practice is worth more than a buyer is willing to pay for it.

If price is the only consideration for a solo advisor looking to sell their practice, that advisor would be better off keeping the practice and not selling it. Knowing that price is only one factor in most advisors’ decision to sell, this fact alone will not necessarily stop an advisor from selling. But, it is important to note that:

To the Buyer: No, the seller is not completely unreasonable.
To the Seller: No, the buyer is not trying to low ball you.

There are ways to make the information between buyer and seller less asymmetric to close that valuation gap. We will cover some of this in future posts.

Past performance may not be indicative of future results. The performance noted does not include fees or charges, which would reduce an investor's returns. Small cap securities generally involve greater risks.