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Fidelity® Identifies Significant Threats to the Value of RIA Firms

The Fidelity RIA Benchmarking Study Finds Risks to Firm Value Include: Lack of Human Capital, Client Demographics and Lack of Understanding Regarding What Can Drive Valuation

BOSTON — Fidelity Clearing & Custody Solutions, the division of Fidelity Investments that provides clearing and custody to registered investment advisors (RIAs), retirement record keepers, broker-dealer firms, banks and insurance companies, today released new research on firm valuation from its 2015 Fidelity RIA Benchmarking Study1 which reveals that only 38 percent of firms have a strong grasp of what can drive firm value. In addition, the study identified several challenges to optimizing firm value, the top one being that many firms simply don't make it a priority. This can potentially result in a lower than anticipated price for the firm when it comes time to sell, merge or transition the business to internal successors.

To help firms maximize their potential value, Fidelity identified "Eight Drivers of Firm Valuation" and explored each of them in the study:

"A firm's value is dependent on many factors – some of them, such as size and revenue, are widely known," said David Canter, executive vice president, practice management and consulting, Fidelity Clearing & Custody Solutions. "Other valuation drivers, such as client demographics, may not be so obvious, but firms still need to consider them in order to get a clear picture of their worth. The demographics of their clients – which can shed light on whether those accounts may grow or depreciate over time – can indicate a lot about a firm's current stability and its ability to grow revenue in the future."

The study also identified a group of "High-Performing Firms" - those firms which outperformed others in the areas of growth, productivity and profitability - and outlined some of their best practices when it comes to firm valuation:

  • A higher percentage of High-Performing Firms have an advanced understanding of what can drive business value (48 percent vs. 40 percent).
  • More High-Performing Firms have an agreed-upon mechanism for determining firm value in the event of an internal transition (75 percent vs. 61 percent).
  • High-Performing Firms are more confident in their people – 63 percent of High-Performing Firms agree with the statement that "Our people have all the skills and training for us to achieve our strategic goals" (vs. 49 percent of all other firms).

"The biggest takeaway here for RIAs is that knowledge is power," continued Canter. "In order to realize the full potential value of your firm, you need to know what can drive that value first. Then, make the important decisions that may ultimately help you achieve those long-term goals."

Four Key Considerations to Help Firms Maximize Their Value

  1. Consider a third-party valuation. If a firm owner is considering taking specific actions that are related to the value of the firm (e.g., issuing equity), getting a third-party valuation can provide them with meaningful insights from an outside opinion on the firm's business value. Most third-party appraisers write an opinion letter that provides an independent perspective on the value drivers within a firm.
  2. Invest the time to strategically manage the firm. Firm owners should commit to long-range strategic planning that includes five- to 10-year goals. Further, use KPIs to help manage the fundamentals of the business. Using KPIs can help quantify a firm owner's goals, manage the firm to these metrics, and foster a culture of accountability throughout the organization.
  3. Invest in the firm's team members, including future leaders. RIAs may want to consider the following two-pronged approach to investing in human capital:
    • Commit to developing talent. Identify the skills the team needs to develop, and provide a combination of additional professional experiences and training to help them reach their potential.
    • Identify and create next-generation owners who have the requisite skills to contribute to the growth of the firm. If a firm owner is planning to pursue an internal succession, they should begin identifying and grooming next-generation owners at least five to seven years before their planned exit. They may also want to develop equity compensation plans to retain key talent, including potential next-generation owners. And they should consider providing employees with opportunities to buy firm equity at a discount to fair market value (FMV) and consider offering seller financing.
  4. Position the firm to capture intergenerational wealth transfer. Firm owners may want to consider a multi-faceted approach that includes the following:
    • Engage the adult children of existing clients. Identify client relationships that have the potential to expand to younger generations and build engagement strategies that not only deepen these relationships, but also encompass these clients' adult children, and potentially even grandchildren, where applicable.
    • Focus business development activities on younger investors. When pursuing the next generation of clients, cultivate relationships with younger investors who meet the firm's account minimum, or who have a combination of high income and strong saving habits that may eventually result in their meeting the account minimum.

For more information on valuation drivers, check out Fidelity's guide "Taking Steps to Help Maximize the Value of Your Firm." And for further information on the 2015 Fidelity RIA Benchmarking Study, click here to access the findings report.

About Fidelity Investments

Fidelity's goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.2 trillion, including managed assets of $2.1 trillion as of Nov. 30, 2015, we focus on meeting the unique needs of a diverse set of customers: helping more than 24 million people invest their own life savings, nearly 20,000 businesses manage employee benefit programs, as well as providing nearly 10,000 advisory firms with technology solutions to invest their own clients' money. Privately held for nearly 70 years, Fidelity employs 42,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit

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