New clients are the key to your practice's value

Most advisory practices are not growing. The fact is, if you back out the market gains of the last several years, the assets under management for a vast majority of the financial advisory businesses that I’ve met with are either flat or, even more commonly, in decline. Sometimes alarmingly so.

Perhaps it’s human nature, but so long as the stock market continues to climb, many advisers will remain complacent and not do anything to change their stagnant book.

But here’s a warning: Once the market hits another serious, prolonged downturn, those advisers with no organic growth will see a precipitous decline in the values of their firms.

The antidote to this is to procure a steady stream of new clients.

I’ve talked with hundreds of financial advisers, and this is the typical evolution of a firm: In the beginning, the adviser has plenty of time to generate new clients and spends a lot of effort on business development by hosting lunches and dinners, golfing, sponsoring charity events, speaking at conferences, etc.

But as these activities produce new clients, the adviser spends more time servicing those clients and less time cultivating new ones. Eventually, the adviser is so busy taking care of the business, there is no time left for growth.  

Some advisers are content with a finite number of clients. Why not? They’re making money. Oh, they may lose a handful each year, but they’ll land a couple of new ones through referrals. This may be acceptable for some, but for those who are thinking about how to maximize a succession plan, a stagnant firm will not command a high value.

When it comes time to sell your practice, either through an internal succession plan or to an outside entity, the value of the business is largely based upon discounted cash flows. If the firm has growing cash flows, it’s worth substantially more than if flows are flat or declining.

To truly maximize the value of a practice, an adviser needs to grow in absolute terms (and not just due to the market).

If you're at a stage in your career where you are considering your own succession plan or thinking about selling to a larger organization, make your firm more valuable by figuring out how to add new clients each month (they are out there). The fact is, that you’re probably good at it. If you weren’t, you wouldn’t have much of a practice. Odds are that what's stopping you (and what's stopping nearly every adviser I see) is the time that's required to run your business.

You need to dedicate the time to development. Set aside a certain amount of time each week when you're not available for anything except those activities that will bring on new clients.

It may be necessary to add staff, but leveraging other people to free you up to generate new business will not only be a huge driver to grow the value of your firm, it will pay for itself many times over.

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Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $13 billion in AUM.