Memo to young advisors: Know the cost of a client

In a fast-paced presentation to InvestmentNews’ 2023 class of 40 under 40 financial advisors Thursday in Manhattan, Fidelity Investments’ Anand Sekhar talked about the importance for advisors of the total cost of serving a client, which he said typically ranges between $7,000 and $10,000.

Sekhar, who’s vice president of practice management and consulting at Fidelity, discussed various trends and topics in wealth management, including how to increase the value of an advisor’s business. In his focus on the total cost per client, he said that Fidelity’s research showed that the median cost is $6,000 and the average is $10,400.

“Know that number,” he said, adding that the calculation was based on a firm’s total operating expense, including the advisor’s salary, divided by the total number of households it counts as clients.

The opportunities for younger financial advisors to increase the value of their practices couldn’t be better, Sekhar noted.

There continues to be a robust number of mergers and acquisitions involving registered investment advisors. Fidelity recently reported that there were 67 RIA M&A transactions during the first quarter of this year, an 18% increase compared to the same period a year earlier.

RIAs are also growing faster than broker-dealers, and an increasing number of consumers are seeking financial advice, Sekhar added.

Firms that embrace technology are growing faster and more productive, he said. They are also likely spending more, but the question advisors should be asking is whether they’re using all the technology properly.

“You need to be thinking about the valuation of your businesses,” Sekhar said. “There are two important points when you think about the valuation of the business. The first is growth of the firm’s cash flows, and second is the risk of the growth of those cash flows.”

Another positive for the valuation of a firm is working with younger clients, he said.

A firm with clients whose average age is 62 or less would get a healthier valuation than to a firm with clients whose average age is 69, due to the potential for organic growth, he said. The growth of an RIA with an older average client age will be hampered by distributions of assets to clients.

Other drivers of an RIA’s valuation include the firm’s size, with larger firms facing less risk of going out of business than smaller ones, and having a diversified stream of revenue, Sekhar said.

The structure of a firm also matters when it comes to valuation, he said, with one-person shop seen as “riskier,” and worth less to an acquirer.

Related Topics: 40 Under 40, Fidelity Investments