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–(BUSINESS WIRE)–Fidelity Clearing & Custody Solutions, the division of Fidelity
Investments that provides clearing and custody to registered investment
advisors (RIAs), retirement recordkeepers, 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
  • 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

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
to access the findings report.

About Fidelity Investments
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 November 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

All statistics in this news release are from The 2015 Fidelity RIA
Benchmarking Study unless otherwise indicated herein.
The content
provided herein is general in nature and is for informational purposes
only. This information is not individualized and is not intended to
serve as the primary or sole basis for your decisions as there may be
other factors you should consider.
The registered trademarks and
service marks appearing herein are the property of FMR LLC.
Clearing and Custody provides clearing, custody or other brokerage
services through National Financial Services LLC or Fidelity Brokerage
Services LLC. Members NYSE, SIPC.
© 2016 FMR LLC.
All rights reserved.

1 The 2015 Fidelity RIA Benchmarking Study (the “study”) was
conducted between April 21 and June 15, 2015, in collaboration with an
independent third-party research firm unaffiliated with Fidelity
Investments. 441 firms participated. The experiences of the RIAs who
responded to the study may not be representative of other RIAs and are
not an indication of future success.


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