Mark Hurley’s View Askew

What does this have to do with the value of your advisory practice? Everything, at least from an advisor's perspective. Like a homeowner, an independent advisor isn't an investor. She or he is a business owner, and that's an entirely different perspective. It never ceases to amaze me that the business-school-trained consulting gurus don't seem to understand this.

In the case of value, a small business owner's alternative isn't to invest her or his capital elsewhere: it's to get another job. One where you don't have the same freedom, the control, the working environment, the staff or your own clients to take care of. Owning your own advisory practice is more than just a "lifestyle" choice, thank you very much, Mark.

By Hurley's standards, practices with under $300 million in AUM don't have much enterprise value. But let's take a quick look at a firm only half that size, with $150 million under management. If the advisor charges clients 70 bps, she or he would be generating a touch over $1 million in annual revenues. Let's say with three staffers, a junior advisor, a nice office, cutting-edge technology, travel to three or four conferences a year, a nice car, cell phones, etc., our firm is running at a pretty high 40% expense ratio. That means the owner/advisor is bringing home about $600,000 a year.

Could they have made more than that in another job or career? Maybe, but $600K for doing what you love to do isn't too shabby, as we used to say. It's also a far cry from Hurley's overstatement: "[Most advisory firm] owners are paid less than they would be as employees of another wealth management ?rm."

Advisors Value Other Advisors
What's more, these firms may not have much value to "investors," but they certainly do to other advisors. Contrary to Mark's contention that "the relationships that the best ?rms have cultivated with their clients are extremely personal and may not be transferable to their successors," FP Transitions in Portland, Ore., has data going back 10 years that shows if handled prudently, 95% or more of an independent advisor's client base will transfer to a new, like-minded owner/advisor.

Hurley does correctly note that the vast majority of advisor-to-advisor practice sales involve "accretion," or "the stripping away of as much of the seller's overhead costs as possible." But the only effect "accretion" has on a firm's value is to drive it up. Thanks to nearly a decade of management gurus advising owner/advisors that they needed to leverage themselves by adding more staff, many of today's firms can handle up to double their number of current clients without increasing overhead.

I'm not saying there isn't value in Mark Hurley's investment banker perspective. I have no doubt that $1 billion in AUM advisory firms which "retain next generation professionals" who are interested in continuing the business, "institutionalize client relationships, marketing, and brand," "build a base of profitable, diverse clients," and "create a culture of compliance" will be much more valuable than smaller firms that don't do any of those things. That's not to say, however, that smaller firms don't have some value, or even substantial value.

Maybe a $300 million AUM firm doesn't have much value to a bank, a brokerage firm or private equity investors. But bringing home mid- to high-six figures for 20 or 25 years, and then selling their firm for another $2 million or $3 million has considerable value for a majority of independent advisors.  

It's all about perspective, and in my experience, the investment-banker grow-your-business-into-a-small-institution-as-fast-as-possible perspective isn't the only way to create value. It may not even be the best way.