Don’t ask advisers what their firms are worth — they don’t know

To do their jobs, advisers must know the net worth of each and every one of their clients. So why is it so many advisers know so very little about the values of their own firms?

The vast majority of financial advisers have no idea what their practices are worth.
Believe it or not, that startling statement is true, according to a preliminary finding from IN Adviser Solutions’ first-ever study of Succession Planning in the financial advisory business.
Of the advisers that have participated in the survey so far, 74% have indicated that they have never conducted a formal third-party evaluation of their firm.
Now, this doesn’t mean that they haven’t done some back-of-the-napkin calculations to roughly estimate what their practices are worth. But the simple fact is that most financial advisers — who earn a living advising on the net-worth and assets of others — are not truly aware of the value of their own firms (and quite possibly their largest and most valuable personal asset.)
It’s more than just an ironic finding, of course. It’s one that may be indicative of a broader theme in the advice industry. “The majority of advisory firms are still being operated as practices, rather than being managed as actual businesses,” said Kelli Cruz, director of research and consulting for IN Adviser Solutions.
“Understanding the value of your firm makes good business sense and should drive your overall business strategy — and in turn, all the other decisions you make about how you run your firms, investments in your people, your technology and your succession planning,” Ms. Cruz added.
Knowing the actual value of a firm is a critical element of a succession plan. And incidentally, just one-in-three advisory firms actually have a succession plan in place, according to the IN Adviser Solutions group’s 2010 Financial Performance of Advisory Firms study.
Adding to the irony is another preliminary finding from the Succession Study that jumps off of the page: When asked to rate how risky it is for a firm to operate without a succession plan, 91% of advisers surveyed indicated that it is either “moderately risky” or “completely risky” to run a firm without one. (Click here to see five reasons advisers need a succession plan.)
For more information about the Succession Planning Study – and to participate directly – click here.