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As an independent RIA owner, it’s crucial to have a clear understanding of the drivers most relevant to your business—and be able to demonstrate them effectively. 

At Dynasty Financial Partners, we help independent financial advisors think through key valuation drivers before, during, and after RIA transactions. Here are the main valuation drivers smart buyers look for—and smart sellers keep in mind at all times.

One caveat before we start. The hierarchy of importance will vary depending on the RIA’s specific circumstances, investor criteria and prevailing market conditions.

  1. Size

Assets under management is one of the most important drivers of RIA business valuations. Advisors with a large and growing AUM are typically more valuable than those with a smaller or stagnant AUM.

  1. Recurring Revenue

Recurrent and consistent revenue streams — such as management fees — are also important drivers of RIA business valuations. Firms with steady streams of recurring revenue are considered more valuable than those with volatile revenue streams or reliance on one-off transactions.

  1. Organic Growth

An independent RIA with a proven ability to grow the business without acquiring other practices is considered more valuable than one that relies on such purchases to drive growth.

  1. Scalability

The ability to grow the business without a proportional increase in spending is another notable driver of independent RIA business valuations. Firms that can demonstrate this scalability are more valuable than those that rely on high (or worse: rising) fixed costs without commensurate growth. And the longer the RIA’s track record of profitable growth, the better.

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  1. Revenue Diversification

Having multiple revenue streams reduces the risk of revenue shortfalls if the sole source of revenue hits a rough patch. In short, independent RIAs that prioritize innovating around their client offerings always look good to prospective buyers.

  1. Technology

Using technology to streamline operations and improve the client experience is increasingly vital to RIA valuations. Firms that invest in outsourced technology are more valuable than digital laggards. Why? Because investing in integrated technology platforms shows the firm is committed to driving scale and efficiency.

  1. Compliance

Having a strong compliance program and being in good regulatory standing is an increasingly important driver of RIA business valuations.

  1. Succession Planning

Having a plan in place for an eventual transition of ownership is another important driver of RIA business valuations. Investors look for RIA firms that have a robust succession plan in place and talented successors to take the reins.

Shirl Penney is CEO of Dynasty Financial Partners

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