How to Value a Book of Business as a Financial Advisor

A financial advisor’s book of business, which encompasses all the clients and accounts they manage, is arguably one of their greatest assets. Determining a fair and accurate valuation is of the utmost importance if you’re interested in buying a book of business or selling one. Knowing how to value a financial advisor’s book of business is essential for making an informed decision when negotiating either a purchase or sale.

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Financial Advisor Book of Business Valuation Models

Advisors can use several valuation models to determine what a book of business might be worth. One is not necessarily better than another, but it’s helpful to understand how they differ. The following are some common valuation models:

• Multiple of revenue: The multiple of revenue model establishes valuation as a multiple of a business’s revenue. A typical multiple is anywhere from one to four times the firm’s reported revenue for the previous 12 months.
• Discounted cash flow: The discounted cash flow method is forward-looking. It estimates the future cash flow that a book of business is likely to generate, and then discounts cash flows to their present value. This method is more complex than the multiple of revenue model, but is widely considered to be the gold standard in determining business valuation.
• Market value: The market value method bases valuations on comps, similar to the way that valuations in real estate work. If you’re using this model to calculate what a financial advisor’s book of business is worth, you’d use similar books of business that have recently sold to establish value.

You’re not limited to applying a single method when valuing a book of business, either. In fact, you may find it beneficial to use multiple models to see how the valuations correspond.

Factors Affecting the Value of an Advisor’s Book of Business

Book of business valuations are fluid and susceptible to change based on the influence of certain factors. It’s to your advantage to understand how these factors may come into play when determining how to value a financial advisor’s book of business.

So what has the most impact? The list includes:

• Assets under management (AUM)
• Revenue levels and overall consistency
• Profitability (and portability, meaning how easily it can be transferred)
• Client satisfaction and retention rates
• Client demographics and the corresponding value the advisor provides
• Scope of services
• Scalability and long-term growth potential
• Brand recognition and reputation
• Location
• Market trends

If you’re hoping to buy a book of business, you’ll ideally find one for sale that rates highly across all of these factors. It’s not unusual, however, for a book of business to score better marks in some areas than others.

For example, an advisor might have substantial AUM and a client base largely composed of high-net-worth investors, but they’ve hit a plateau with scaling, hence their reason for selling. What you have to decide when valuing a book of business is what it’s worth to you and whether the positives outweigh any negatives it may have.

How to Value a Financial Advisor’s Book of Business

Whether you’re valuing another advisor’s book of business or your own, the first step is selecting a valuation model to apply. You may find it helpful to start with a multiples model and then consider discounted cash flow and the market values of comparable books of business.

When you’re ready to establish a value, here’s what you’ll typically need to do:

• Perform due diligence, collecting relevant data about the book of business, including the AUM, revenues for the last 12 months and a breakdown of client demographics.
• Analyze revenue-generating activities associated with the book of business, noting which ones produce the most/least income.
• Take a deeper dive into client metrics and consider how much AUM each client brings to the table, the amount of revenue they generate and customer lifetime value.
• Review retention rates, engagement rates and client referral rates, if that data is available, to evaluate overall loyalty and client satisfaction.
• Consider scalability and where you might be able to encourage growth by filling service gaps.
• Look at how comparable books of business are selling, based on current market trends.

You may find it helpful to work with a business valuation consultant who’s experienced in the financial services industry. A consultant can evaluate a book of business and offer an unbiased opinion on what it might be worth if you’re buying or selling.

How to Increase Your Book of Business’s Value

You may not be planning to sell your book of business right now, but if it’s a possibility in the future, there are some things you can do to boost its value, for example:

• Expand the range of services you offer to attract new clients and increase AUM while generating more profits from the clients you already advise.
• Develop strategies to increase client engagement and satisfaction, which can improve retention rates and encourage clients to send more referrals your way.
• Invest in technology and tools that allow your firm to operate more efficiently while providing an improved user experience for your clients.
• Prioritize professional development for yourself and the members of your team to expand your knowledge and skill set.
• Focus on business development activities, including leveraging partnerships or collaborations, to increase brand recognition and awareness.
• Review expenses to look for opportunities to minimize costs and increase profit margins.

In short, the goal is to make your book of business as attractive as possible to a potential buyer. Talking to a business valuation consultant could help you identify other areas of improvement that you may have overlooked.

Frequently Asked Questions (FAQs)

How Much Is My Book of Business Worth?

In the simplest terms, an advisor’s book of business is worth whatever an interested buyer is willing to pay for it. That being said, valuations can depend on a variety of factors including assets under management, client demographics, geographic location, annual revenues and market trends. The multiple of revenue model may offer the simplest calculation; you’d determine value by multiplying the last 12 months of revenue by your chosen multiple.

How Much Should You Pay for a Book of Business?

The amount you should pay for a book of business can depend on how much capital you have to invest and the projected return, as well as the estimated valuation. That being said, purchasing an advisor’s book of business may cost anywhere from a few hundred thousand to a few million dollars. Keep in mind that steep competition could drive the purchase price up.

Is Buying an Advisor’s Book of Business Worth It?

Buying a book of business could be well worth the investment if you’re able to retain most or all of the advisor’s clients, expanding your AUM and increasing revenues in the process. That being said, buying a book of business could be risky if you’re uncertain about how the advisor’s clients will receive the transition or if actual revenues fall short of your projections.

Bottom Line

There’s no single method for how to value a financial advisor’s book of business, but that isn’t necessarily a bad thing. Applying different valuation models can give you a range of numbers to work with, which may prove helpful when you’re ready to negotiate the purchase or sale of a book of business.

Tips for Growing Your Advisory Business

• Expanding your digital footprint can help you build credibility and authority while attracting new clients. If you have limited time to devote to online marketing, it could make sense to partner with an advisor marketing platform. SmartAsset AMP helps you match with leads so you can grow your business at a pace you’re comfortable with. Schedule a demo to learn how you can use it to gain new clients.
• Assessing valuations is a central element of succession planning. If you don’t have a succession plan in place yet, it’s important to consider what might happen to the business you’ve built once you’re ready to retire or move on to another venture. Likewise, business continuity planning is also important to ensure your clients are taken care of in the event of a natural disaster or another unforeseen circumstance.

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