Valuing Your Book of Business

(Originally Posted December 18, 2018)

As an investment advisor, you work hard to create and maintain a profitable book of business. The many years spent with clients to develop relationships, build trust, and understand investment objectives result in significant value to both the brokerage and you as an investment advisor. At some point during your career as an advisor, it may be important to have that value assessed through a formal valuation.

Why Would a Valuation Be Needed?

A valuation of a book of business can be required for a number of reasons, which includes (but isn’t limited to):

• buying or selling a book of business or a portion of a book of business;
• negotiating an advisor succession plan;
• transferring your unincorporated advisory role into a corporation; or
• determining the equalization payment in a matrimonial dispute.

Areas That Can Impact Value

Each investment advisor is unique. You work in different corporate environments. You have different investment strategies, target different clientele, and have varying degrees of success. All of these factors influence the value of an advisor’s book of business.  We discuss a few key factors below.

Type of Brokerage

Is your book of business associated with a chartered bank (e.g. RBC Dominion Securities)? Alternatively, are you operating through an IIROC- or MFDA-member firm independent from the chartered banks (e.g. Investors Group Financial Services)? Although both are great options for advisors, bank-associated advisors often benefit from name recognition, as well as higher referral rates and client loyalty from pre-existing bank clients.

Each brokerage will also have agreed-upon terms dictating the relationship between the brokerage and the advisor. Business succession plans, revenue-sharing agreements, non-compete agreements, and non-solicit agreements all influence the value of a book of business.

Assets Under Management

The nature of your investment holdings impacts the value of your book of business. Does your book of business hold $20 million of assets or $250 million of assets? And what percentage of those holdings is fee-based rather than transaction-based? Larger holdings usually result in higher commission levels, and commissions on fee-based holdings are typically more stable. If you sell insurance products in addition to the management of investments, some value may also be derived from the insurance-related revenue stream.

Client Characteristics

The nature of your client-base also influences the value of your book of business. Does your book of business consist of very large holdings from only a few clients, or do you have many clients with varying sizes of holdings? Are your clients diverse when you consider their income-level, net worth, age, and geographic location? Do you have a high degree of client loyalty or have you experienced extensive turnover in the past? We consider all of these factors when determining the value of your book of business.

Rules of Thumb

Rules of thumb have varying levels of applicability. Since the market dictates value, rules of thumb can be misleading if not properly understood. As discussed above, there are many factors that impact value. Applying a rule of thumb to a metropolitan, bank-associated book of business, for example, may not be the equivalent to applying the same rule of thumb to a rural, independent book of business. We discuss Rules of Thumb approaches in a previous Davis Martindale two part blog series, Introduction to Rules of Thumb in Valuations and Application of Rules of Thumb in Court (Part 2).

If you need a valuation of your book of business, give the experts at Davis Martindale a call. We have extensive experience in analyzing books of business and preparing valuations.