This is where you start.
There is a very rough formula in the independent/RIA sector to determine the value of your business. The wirehouse firms each have their separate formulas. If you are in a wirehouse, you should also use this formula, just to check.
The formula is: 2.2 x T-12 fees + 1.1 x T-12 commissions.
This is not hard. It’s not complex algebra.
T-12 = trailing 12 months.
Let’s say you have a practice with $1 million in gross revenue; $500,000 in fees and $500,000 in commissions.
2.2 x T-12 fees = $1,100,000.
1.1 x T-12 commission = $550,000.
Rough value = $1.6 million or so.
The math obviously is easy. The implications are profound.
By converting to fees, $1.6 million becomes $2.2 million. Again, more or less.
There are challenges here. According to “The State of Retail Wealth Management,” a Mackenzie/PriceMetrix study, fee-based revenue as of 2017 was 63%. Only 46% of households had fee accounts. (I have posted a link to this study on our “FA Retirement Readiness” page, which provides some other interesting benchmarks.)
We have developed a strategy to help you do this. If you are not yet 90%-plus fees and you are over a certain age, it’s important to get on with it for several reasons, not the least of which is that you can improve the value of the company, which sooner or later will be passed on to a family member or sold.