Net flows are key to value

If selling or merging your wealth management firm is a possibility for you within the next few years, use 2025 to focus on growing your net flows.

I’ve been involved with the purchase of over three dozen firms, so I know what makes a company worth a premium price and I know those things that degrade the value of a business. There are a number of factors that separate a great firm from a mediocre one, but there is one metric that illustrates the health of a firm and drives value: net flows.

Net flows are essentially how many new dollars in AUM your firm is bringing in. Many smaller advisors don’t even track this number and simply look at how much AUM increases or decreases in any year. This is a mistake. 

Buyers of wealth firms understand that the financial markets will have an impact on firms over time, and bull markets will have a supercharging effect. What they really care about is if the firm is growing excluding the change in value of AUM assets. 

There are four key metrics in measuring net flows: 

•    New client new money (NCNM) 
•    Existing client new money (ECNM) 
•    Withdrawals 
•    Attrition 

All four of these are critically important to a healthy firm and should be carefully monitored. If you aren’t tracking these, I’d highly recommend you do so.

Attracting new clients is obviously a core tenet of any great organization. New clients bring in new assets to manage, which in turn bring in new revenue. Firms that don’t prioritize adding new clients each year won’t be nearly as attractive as those firms who don’t. 

A healthy wealth management firm will have existing clients who add to their accounts. Clients may sell businesses, invest for their retirement, fund 529 plans, etc. It’s important for a firm to have clients with the ability to continue adding to their accounts, as opposed to only retirees who have few opportunities to bring in new assets. 

Withdrawals put a real drag on asset growth and the corresponding revenues associated with it. Obviously, many clients rely upon withdrawals for income needs, but the better a firm does in managing these withdrawals, the higher-quality that firm is. 

Consider a firm that has a core group of clients who took buyouts from their employer in the form of lump-sum pensions. These clients will depend upon monthly withdrawals to fund their retirement. An advisory firm that has a high percentage of these clients will likely face higher withdrawals than one whose clients have monthly pensions. After all, a $1 million account where the client has to make a monthly withdrawal has a much lower lifetime value than a $1 million account without the baggage of having to service the client’s income needs. 

Every firm will lose clients each year due to a variety of reasons. Some clients will die, and the heirs will either spend their inheritance or move it to another firm. And some clients will fire you. The better a job you can do in retaining your client assets, both in keeping the heirs with you as well as providing great service, the lower your attrition will be. 

Positive net flows can have a tremendous multiplier on the value of a business. If you aren’t growing in this area, the only increase your firm will experience in the future is through the change of your clients’ portfolios. However, if you can get your net flows in the 5 percent range or more, your firm will command a premium price when it comes time to sell or merge.