Building a financial advice business you can sell

CHICAGO (Reuters) - Isn’t it ironic? Most independent financial advisers have no exit strategy and let their firms die through attrition, according to research from Fidelity Investments and consulting firm FP Transitions.

That scenario is bad for clients, and it means advisers reap no benefits from the businesses they invested years building.

A firm is an adviser’s largest asset, says Waldemar Kohl, vice president of practice management for Fidelity Institutional Wealth Services. “It’s bigger than their home, bigger than their retirement plan” so advisers should think about how they can tap that value when they leave the industry.

Advisers who formulate a plan to sell - either via succession plan to employees or a family member - or to an unrelated third party, can secure a lifetime income stream and a business that continues to serve valued clients.


After an adviser friend sold her practice for a significant sum, Olympia, Washington-based planner Nancy Nelson sought a valuation through succession planning firm FP Transitions. The experience was eye-opening.

“Cash flow can look great, but if you’re a one-man band, it’s not attractive to a buyer because when you go, the revenue goes,” she says.

Based on FP’s recommendations, Nelson streamlined her firm to make her firm buyer-ready. She created standard operating procedures and an infrastructure that could run without her, got rid of problem clients, outsourced compliance, and transferred the knowledge that only she had into the company’s customer relationship management software.

She also gave her two administrative staffers more responsibility, to get clients comfortable with them. “I was slowly pulling myself out, so it would be a seamless transition if I left,” she says.

Shortly after taking all these steps, Nelson successfully sold her business to a third-party buyer and retired at 62.

While an outside sale can work out well, sellers typically can benefit more with a succession plan that gradually transfers ownership to insiders, says FP Transitions’ founder, David Grau, whose firm conducted over 1,200 valuations of independent practices last year, most in the $1.5 million to $2 million range.

Advisers who do the gradual transfer can sell for as much as seven times the firm’s annual revenue, while third-party sales tend to brings in much less — about twice annual revenue, topping out at $1 million, he said.

The common thread among successful transitions — and the step most advisers miss — is long-term planning.

They figure they’ll sell “someday,” but by then it’s too late, says John Anderson, a succession planning consultant for outsourcing firm SEI. He tells advisers to set aside one morning a week for planning, and to expect it to take years to develop a business to the point where it can be turned over or sold to someone else.

“A misconception is that the transition phase of handing off the business is short,” he says. “It’s not.”

Editing by Linda Stern and Lisa Shumaker