In every business I work with there are two things that lead to high valuations.  They are having a recurring revenue stream and having the owners of the firm be passive owners.

In the wealth management business we have the first all tied down.  In fact, the recurring revenue model that most RIA’s and wealth management firms is matched by very few businesses or industries.  The second being a passive owner is a really hard thing to accomplish.

First, what is passive ownership?

My definition of passive ownership is simple.  It means that you as the owner of your firm won’t be involved in any of the day-to-day operations of your firm.  It means that you won’t be servicing clients, you won’t be involved in the sales process and you won’t be involved in making investment decisions.  All of those are part of day-to-day firm operations.

You might be saying to yourself that reaching this goal is impossible.  And in most cases, I would agree with you.  It’s the main reason that most wealth management firms only sell for 35 to 40% cash on closing.  It’s also the main reason that many owners of wealth management firms never really get paid the full amount that’s due to them when they sell their firm.

What’s the first step?

Let’s assume that you want to become a passive owner.  If that’s true, You need to be committed to having all of your clients serviced in a team manner.  Your clients can’t be attached to you.  They have to be attached to your firm.

You can’t be the primary rainmaker of your firm.  You have to have put systems in place for everyone to be part of the marketing process.  There has to be several people in your firm besides you who can create new clients.

You have to use an investment process that isn’t based on your decisions.  Investment decisions must be made as a team.  Whether you’re involved or not won’t make a big difference in investment outcomes.

Do you want clients or customers?

The real question is do you want clients of your firm to think of you as their advisor or do you want your firm’s clients to think of the firm as who they do business with.  If the later is true, you’ll need to take specific actions to make that a reality.

You’re going to need to be able to explain the difference between a customer and a client.  A client is someone who does business with a particular advisor at your firm.  A client calls and asks for the same person all of the time.  A customer does business with your firm.  A customer knows that when they call your firm, they just have to explain their issue and there are several people who can and do help them with service needs.

Think about it this way, if you depend on one particular person at a company, what happens to your loyalty if that person leaves.  Now, think about this, what if you deal with several people at a company and whether any one particular person leaves you’re not going anywhere.  That’s the difference between a client and a customer.

Are you willing to trust your staff?

If you really want to start having your clients think of your firm in a different way you’re going to have to trust your staff.  You’re going to have to start allowing them to take actions that you may not have allowed in the past.  You’re going to have to develop reporting systems that let you know what’s going on without having to do it yourself.

This all comes down to trust.  You want to have your staff earn your trust and you want to allow mistakes to be made by people other than you.  You do want to make sure that there is always a learning component that goes with those mistakes.  It’s the only way you’re going to move your firm to one where your clients trust everyone can help solve their problems.

The payoff is huge.

If you’re able to move your firm from being one where clients are attached to an individual advisor to one where clients are attached to your firm your payoff will be huge.  You no longer have to worry about any one advisor leaving your firm and taking clients with them.  And if you decide to sell your firm you’ll have solved the two problems that every buyer wants……recurring revenue and owners operational irrelevance.

Are you willing to work towards doing what’s necessary?  You’ll like what you get.


Topics: Creating Value, For business owners, passive ownership, business value enhancement

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