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Fidelity identifies significant threats to the value of RIA firms


New research from Fidelity Clearing & Custody Solutions on firm valuation taken from the 2015 Fidelity RIA Benchmarking Study, reveals that only 38 per cent of firms have a strong grasp of what can drive firm value.

In addition, the study identified several challenges to optimising 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 maximise 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,” says David Canter (pictured), 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 per cent vs. 40 percent).
More High-Performing Firms have an agreed-upon mechanism for determining firm value in the event of an internal transition (75 per cent vs. 61 percent).
High-Performing Firms are more confident in their people – 63 per cent 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 per cent of all other firms).
“The biggest takeaway here for RIAs is that knowledge is power,” says Canter. “In order to realise 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.”

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