David DeVoe: How to Maximize Your RIA Firm’s Valuation
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RIA valuations are still high, private equity is everywhere, and industry consolidation is accelerating. What does it all mean for your firm's future? Hi, everyone. I'm business coach Steve Sandusky for Barron's Advisor, the WayForward podcast. My guest today is David DeVoe. David is the founder and CEO of DeVoe & Company, which is a leading consulting and investment banking firm serving the RIA industry. He

Thank you.

and what that means for founders who are thinking about selling. We also dive into the tension between independence and scale, how organic growth has collapsed down to just GDP growth levels, and what advisors can do to reverse that trend. In addition, David offers a three-part framework on how firms are valued, prioritized,

practical steps to increase your multiple and candid insights into how to retain and grow talent in today's competitive market. With that, here's my conversation with David DeVoe.

So what's the punchline here? M&A is hot. Will it continue to increase and be hot? Yeah, we think it will. We're a bunch of nerds here at Devone Company. We've crunched a lot of numbers and we think we probably have five, maybe even seven years of additional M&A activity coming forward. And that's an assessment of not only the demographics and the aging founders of these companies and those that have to seek external solutions, but also the

But it's also part of another key trend, Steve, that you're familiar with, which is the potential power of scale. So many of advisors today, and this has been happening for about four or five years now, seeking to sell their organization to really have more fun. And what I mean by that is when you join a bigger organization, and it could be 10 billion, it could be 200 billion plus, those larger organizations are

can have a lot of positive impact on the firm that's selling to them. It can enable them to grow faster because they have access to referral networks, but expertise. It can enable them to maximize their operational efficiencies. It can remove administrative headaches.

Really importantly, too, it can expand the services and capabilities that a given advisor can offer their clients. Over the last probably five or six years, when I talk to folks and they hear that M&A is up, they intuitively think, oh, that makes sense. The demographics of the country are aging. Surely the demographics of the founders are aging. This is driven by succession planning issues.

And interestingly, it is not. That's been the number two driver. So the number one driver for about the last five years has been that interest in gaining scale and gaining shelter to a degree as more advisors have sold to larger firms. And the impact of that, Steve, another element, which is the development of what we're calling meta-advisors.

RAs. So these are not only mega firms, large firms, they're unique. They're not just big. They have sophisticated management teams. They have access to potentially unlimited capital, in most cases, private equity. They're really focused on differentiation. They're focused on running the very best company they can. This emergence of about

Two dozen meta firms, not only the Greek meta for comprehensive and macro, but also the most effective tactics available to run a company is really where that meta comes from at Devo & Co. There's about two dozen firms and they're starting to shape the space and we expect that trend to continue.

Talking about these meta firms and talking about advisors that want to sell for reasons other than succession planning, let me throw a couple of thoughts out there and get your reaction to it. So one of them is because there's been so much competition in recent years to buy these firms, you've got, of course, the rise of private equity. Valuations have been bid up significantly. So on the one hand, you've got sellers who are looking at, oh, my goodness, we're

The price I could get for my firm today is life-changing, right? So I could get a boatload of money. So maybe I'm going to sell for that. So how do you think about the tension between if I sell, I can get a whole bunch of money. And yeah, it might be fun to work for one of these meta firms because we've got all these other opportunities. I've got a lot of other advisors that I can pal around with and we can go to conferences together. And it's fun to have other colleagues that I can work with against giving up, quote, my freedom.

Because most of these are entrepreneurs who started their businesses and they started them because they wanted to be the decision maker. They didn't want to have to have a boss. They didn't want to have to report to anybody. So how do you think about the tension between the benefits of selling to one of these big meta firms for a big check versus giving up my freedom?

Yeah, so much interesting things in there. Let's unpack that. I can't help but think I launched Devo & Co about 13 years ago. It was just me. We're now 25 people. Literally, Steve, I decided to leave the custodian I was at. I had the business plan. I was ready to do it. I got on a plane and I went to a wedding.

And we got on a bus to go to this destination wedding. And the person next to me had started their own company like four or five years before. And I said, wow, this is so great. I'm so excited. And he had this interesting point of view. He said, look, what's interesting about starting your own company is you learn that

You're giving up the delusion of security of being at a very large company for the delusion of freedom for being an entrepreneur and running your own company. And if you're anything like me, Steve, I still work 65 hour weeks, sometimes seven. Now I love it. And I'm

I love what I'm doing. And I'm finally getting smart to say, hey, maybe I work from Europe for a couple of weeks or maybe I get creative in what I'm doing. It is an interesting element to consider. And a lot of entrepreneurs I talk to are just wired that way where they want to go out and create greatness and run a really good organization. So the concept of freedom is one interesting concept to explore. Another interesting concept that we work closely with our clients is the concept of control.

So when I started in this industry, I started focusing on a REA M&A activity over 20 years ago. And 20 plus years ago, I was probably at the bar a little later than I am today. And back then I'd be chatting with some of these folks that had launched their own REAs a while ago. And there was passion after a drink or two. And they were saying, look, I'm never going to go back and work for someone else. I want to control everything in my organization. They had scar tissue leaving these big companies and rightly so.

things have changed over time and i think there's a certain business maturity and by the way my point here is not going to be everyone should sell externally i passionately don't think that let's surely talk about succession as well but part of what we're doing when we work with sellers is to say all right let's figure out the characteristics of the very best buyer for you a matter of fact to boneco we don't tell our clients we're the very best at getting you the highest valuation

We say we're the very best on the planet in helping you find the very best fit for your organization, to help you achieve your goals and objectives, to be the right culture, to make the future chapters that you will write for those in your organization, your clients, better than they could have been written if you didn't do a transaction. And frankly, if they can't be written that way, you shouldn't do a deal. We're not shy to tell folks that you shouldn't do a deal. With that in mind, part of our first month or so that we work with someone is to get to know their goals and objectives and their company and all that stuff.

But one of the elements is related to control. So we'll often say, hey, we're respectful. I joke. I'm a control freak. You're a control freak. Entrepreneurs typically are, or business owners. Defining control. So we'll often say, what do you want control over? Do you want control over everything? Yes, Dave, I surely do. Okay. Do you want to control the whole compliance part of the business? Okay. You got me there. Surely. I don't want to control. How about technology? Do you enjoy that part of the equation?

No, I'd really love to outsource that. That's a headache. And you start going through it. How about client experience? Yes, I 100% want to make sure we have control over that. So you start, there's no wrong answers there. Each firm you talk to, each individual is going to have a different set of things. And it's a valuable process to go through because once you have clarity on what you no longer want to oversee, because I forgot part of the context here is when they're talking to us, it's not...

that guy at the bar 20 years ago or that woman at the bar 20 years ago with that passion around control. At this stage, books are in their 50s and their 60s.

We've all had friends close to us, loved ones that have had something happen, a tragic situation or disability or things like that. So I think folks at this stage of their life cycles are often looking at their future through a different lens. And then you get into, all right, what's most important to you? What do you want control over? So in any case, I think many advisors now are starting to think through what does make sense and what not.

Do they want to join an organization where they give up full control or maybe an organization where they still have control over certain elements? Do they want to join a firm that's going to help them solve these business issues, but not those? And in many cases, it doesn't make sense to sell externally at all.

Now, this is an interesting tension point where in the marketplace, some of those meta RAs that are backed by private equity and have this proof of concept that you can sell from one private equity firm to another at these high multiples, et cetera. Those firms, those two dozen firms can probably pay more than anyone else in the industry. These massive valuations, they've been high for about three and a half years. You sell to someone who has 10 billion or 5 billion, they can't or shouldn't be paying those extreme valuations. They're still high, but they're not as high as that.

And then in many cases, if you're selling externally, it's at a discount, right? 25% is pretty common. So Steve, we're in an interesting place. And if I was a slimy banker, I'd be yelling this from the rooftops, but I whisper it quietly to say, hey, we have an industry that you just noted where you can sell internally for a certain amount or externally at probably 80% more.

So it's an interesting dynamic where folks are thinking through what the right solution is. Now, the good news is most advisors are not coin operated. Most advisors have made more money at this stage of the career when they're talking to us than they ever imagined they would. It's not just ringing the bell and taking the highest valuation. It's really thinking through a number of other strategic issues that are so much more, that often are more important than the economics. Back to that equation, we have an industry where these valuations are sky high.

Good news, there's a lot of strong buyers in the marketplace. Not only those meta firms, but other organizations are managed really well. So I like to see a wide set of options for advisors who decide they might want to explore selling externally. And I think on that dimension, it's a very good time. There's a lot of healthy buyers in the marketplace if one chooses to sell externally.

You mentioned control. You also talk about these meta firms, and there's definitely people out there that think that the industry over time is going to coalesce around a small number of these really large firms that might control upwards of 80% of the assets.

And then what I find very interesting is we've all heard that old saying, everything old is new again. And it seems like so many of the people that are the head of some of these large RIA firms today are people who rolled out of the wire houses 30 years ago, let's say, because they didn't like the strictures of the wire house environment.

And now what are they doing? It's almost like they're recreating the wire house, but in a quote, independent model. So I'd love your take on are these meta RIA firms, are they simply recreating the wire houses of yesteryear with more of an A model, with more of a planning model, perhaps with more freedom and flexibility? But what's your take? Are we just recreating what many of them tried to get away from?

Yeah, I'd say yes and no. And what do I mean by that? And I think my main answer is no, it's not the wire house. Let's pull that apart a little bit.

These meta organizations are growing and they're going to accelerate their growth. I think over the last probably 10 years, I was on a panel with someone from McKinsey. They had done analysis. And I think over the last 10 years, the largest firms in the industry have grown by 15x, 15 times over not a long period. And they're only going to continue to do. We're going to see trillion dollar firms, et cetera. Are they getting bigger and bigger and approaching the potential scale of these wire houses? To a degree, yes. The wire houses are absolutely

So on one side, let's just say the size dimension, they're getting astronomically bigger than they've ever been in this industry. I'll go to the other extreme too. The biggest problem with the wire houses back in the day, and it still exists to a large degree, it's become a little blurrier, but the wire houses and the FINRA model do not truly have client interests as the first and foremost, right? They don't have a fiduciary commitment and the vast majority of their models and their advisors.

And I think that's a critical element in terms of the type of company you're working with. Joining a wire house, a FINRA-based organization, et cetera, there is a different ethos throughout that entire organization. Good news, many of these meta firms in today, and who knows a year from now or five years from now, but many of them are run by some of my colleagues when I was at Schwab. We were MDs together in the trenches 20 years ago. So they lived and breathed and grew up in this industry. Others, as you say, had opportunities

REAs and back in the early days, they were trained at the wire houses, et cetera. I think the good news today, and so far private equity has behaved pretty well. They didn't grow a halo because we've seen private equity behave badly in other spaces, coming in, buying a company, gutting it, leveraging up on debt and then flipping it to someone else. They haven't done that in this space. And I say, they didn't grow halos. Right now, that's not the right way to treat organizations in an industry like ours.

hyper fragmented, but potentially grow if you want to keep people. It is a people-based organization. So we can come back into the details of private equity or not. But long answer your question, I think it's a few things.

Are you selling to the old school wire house? I don't think so because of the fiduciary nature of these firms and because of the ethos of that organization. I think even the client to advisor ratios are going to be in the 70s zone where at a wire house, you're at 250. But you are being part of a much larger organization, which has some pros. You're going to have some operational efficiency and administrative headaches go away. You'll have a broader set of capabilities.

but you'll feel more like an employee in most cases. You're not going to have that control. You're not going to have that independence. And that is also going to affect the culture and the relationships that you have with your employees to a degree, and sometimes to a large degree. I think it's interesting to look at. I think it's going to be an interesting trend to watch. And yeah, the headline is they're not like the wire houses, but there's some characteristics that are similar.

I suspect, and reasonable people can certainly disagree with this, but I suspect that over time, as these firms get bigger and bigger, it's going to feel more and more like a wire house. And I'm not saying that's a bad thing. There's certainly good things about wire houses, but maybe it's just more the size. And with size comes bureaucracy, and with size comes rules and regulations and policies and procedures, which a lot of people in this space don't like.

And so I think what we're also going to see, and this has been talked about for a while, is one meta RIA merging with another meta RIA to create a super meta RIA. So I think we're all waiting for that to happen. And then of course,

They're going to try and go public. We've seen a little bit of that happen. We haven't had huge success in that area yet of these firms going public. But I think over time, that's likely to change. But certainly with the private equity back, they can keep selling them to each other for a while, but eventually they will probably go to the public markets. And then you're subject to the same pressures that a public market

CEO has in terms of pleasing shareholders. So I think at the end of the day, maybe it's a number of years down the road. Anyway, I just think we all need to keep our eyes open for that. And like we've seen that with Focus Financial, for example, that you sell to Focus and you think I'm going to be part of this organization. I'm going to have independence, but some benefit. And then it gets sold again to another firm. And now we're consolidating. Things change, but all we can do is just make the best decision today based on the information that we have at hand.

Yeah. And Steve, I think you highlight as this business matures, some things are staying the same. Like the number of advisors or REAs has been pretty consistent. Every time someone sells, someone else enters the industry. They leave a wire house or an LPL or something like that. But it is changing and it's getting more complicated. Yeah.

And I think you're spot on. Where does this end? A couple of years ago, and sometimes I make predictions and I get them right. And sometimes I made them wrong. I said, hey, is this the year we see the consolidation of the consolidators? I think there's a couple of reasons we haven't seen that and may not see that for a while. The management teams of those companies know their valuations are really high. There's not really an arbitrage opportunity.

And unless someone's ready to give up a CEO role, why would you go merge with someone else? There's too much fun things for those executives to do. But yeah, it's a fascinating dynamic. 20 years ago, when I started in this industry, 20 plus, the private to public market arbitrage was the brass ring. And gee, once we get big enough to go public, then valuation goes up, all these things happen, et cetera. And we saw with focus that that doesn't really play out the way many of us expected to. Now,

Not only did Focus go private because their valuation was really lower in terms of a multiple than what firms were paying for private firms. What many don't realize is probably a bigger reason was the access to debt to go out and do transactions. When you're publicly traded, just as you alluded to, there's not just regulatory things that you need to worry about and hitting the numbers and all these things that can be very negative and is problematic.

Not part of the industry that you and I have grown up in, but there's also a different set of debt ratios and comfort that the public is willing to have happen than if you're private. So literally part of the equation was, let's take them private so we can lever up the firm to do more transactions. You probably noticed focus had slowed down to a high degree. It's interesting. It's complicated. I think that's part of why our company has continued to get momentum because people are

are looking for experts because it's not just selling to a bigger firm which is just bigger than us it's selling to a private equity backed firm and does that mean they sell to another one down the road as you mentioned where does that end it's either maybe going public and i think we'll see some public offerings maybe sooner than one might expect

or the other thing is a sovereign fund. And what does that look like? That's eventually private equity. These checks are big enough that you either have a consortium or there's just a lot of money overseas. And that's a whole nother interesting dynamic. So it's going to be an interesting dynamic space that we watch over the next five or even 10 years.

And as potential sellers, think about ways that they can increase their valuation. There's definitely a number of levers that they can pull. Hopefully they're starting to pull these levers several years in advance. But one of them, of course, is increasing your organic growth rate. And there's been a lot of talk about what is the organic growth rate across the industry? What's your take on what is the organic growth rate in the RIA business right now?

And the way we define in many in the space to find organic growth is backing out the market, backing out any acquisitions that might have occurred if you brought on a breakaway broker and they had assets, backing that out. So it's truly just the clean organic growth of an organization.

Now, you and I know, and all your listeners know, that the REA model is truly the best way to serve U.S. families and investors. I passionately believe that. I consider ourselves part of the REA community, not a vendor to clients. We believe in this. Wirehouses have

have come to hire us and we're like, no, like you're at the other end, we're here supporting this community. So we have this great way of supporting and helping US families and individuals to have better lives, right? I passionately believe that. And this model is better than, houses will be provocative and say it's better than hybrid models too. I just really think that holistic approach of independent wealth management and all the characteristics is truly the best way for folks to do wealth planning and even planning for their lives.

This great mousetrap should be growing really quickly. Forget the markets, right, which we've already backed out of the organic growth equation. It should be growing at 9% or 10%, and it was back in 2017. And that's what I, as a strategic person, think should be happening for a model that's so great. But it's steadily declined.

And it went from 9% to 7% to 5% to 4% to 3%. Just a steady decline. And us consulting nerds love those nice steady lines as well, except when it's bad news. And this is tragic news because now we're growing it, really the GDP. 3% has been the consensus. Different ways to cut it. And it's going to be different with firms that are between $100 and $500 and $500.

and a billion and different things and multifamily offices are different rates. But overall, this industry right now, the consensus is probably around 3%. Some of that said zero recently. There's some data points that indicate it's gotten up to 5% or 6%, which is just a tragedy. And Steve, it's a self-inflicted wound.

Part of your job and my job is to throw the black snake on the table in some cases, either be provocative and have people think or also call ourselves out as part of this community and say, hey, what have we done wrong or what can we do differently? And I think what ended up happening is just complacency.

And gee, if you have the stock market, which we haven't talked about, right? The stock market is a great part of this model and why private equity is flowing into this space so aggressively is over time you have a 6% wind at the back of all these firms, right? If you're basing your fee structure on fees, which the vast majority are, and as a consultant, all of them should, it's just a wonderful model. Unfortunately, that growth of 6% or even more, which we were experiencing and we do experience over certain times,

created this delusion that firms were growing. Advisors, owners were looking at their growth at the top line. They're like, wow, I'm doing great. And I think a certain marketing complacency started taking hold. And it wasn't just psychological complacency. It was economic complacency. So being a nerd, I looked at 2017 to 2022, where we saw the organic growth drop by six percentage points. And I said, what is happening here?

Yeah, it's complacency. I talk about it amongst advisors, but can I get more detail? So we started going into custodian benchmarking studies and found that over that five-year period, on average, advisors cut the marketing and business development spend. We went into every line item and identified those elements and saw that they cut that spend by 50% in that period.

Guess what happens? You cut that spend as real and things slow down. For years now, I've been really passionately focused on organic growth and how we can change this, how we should change this. Forget ourselves. Let's just help U.S. families and individuals by amplifying what we're doing. And by the way, too, another thing that folks should be aware of is in this industry, typically 2% of revenues is invested back in the firm in the form of marketing or business development.

And it went down to 1.1% over that period. Folks, financial services overall is close to 7% that most firms, major firms, publicly traded firms, financial services typically invest 7% in their growth initiatives. We have RAs that are investing two or G all the way down to 1%. It's come back a little bit over the last two years. So what I would say is back to valuation, growth is the most sensitive item for evaluation.

So if we're thinking technically, hey, Dave, how do we maximize the value of a firm, especially if we have several years, it's creating that growth machine. If you are able to grow your firm at 1% faster than you could have your twin, it will increase the value of the firm by about 6% or 7%.

And yes, if someone says, as they have, when I say this on stage, wait a sec, Dave. So you're telling me if I grow 3% faster, I'll be worth 18 or 21% more. Is that what you're telling me today? I'm like, no.

Yes, absolutely. And I will give you the names of consolidators that will pay you 20% more for a faster growing firm. That growth is just really powerful, that growth machine. So now it can't just be you figured out a way to do it one year, you turned on the charisma or you worked a little harder. We're talking about a growth machine where you can demonstrate and convince someone appropriately that.

that this organization has processes and things in place that will grow up faster. That very sensitive metric, and it's just so important for all your listeners, your ability to take the time and energy. And I

I think of REA's growth as a science. We are cracking the science at Devo & Co. And it's not just me nerding out. We brought on John Mitnock, who, when CD&R took out the leadership team at Focus, John was like, hey, this is still fun. My wife will let me work 20 hours a week. She's not going to let me work 40. But I still love doing this stuff. He

called up and joined a bone cow and we're doing a number of things to really help this area community taking that time and leaning in. I know, especially if you've fallen into that trap of complacency, gee, how do we grow this thing? Digital has continued to get momentum. I need to figure that out. Is AI going to help or not? So it is a complex equation. It's just like succession planning, Steve. So few people have succession planning and it's because it's so complicated. So few people are leaning back into growth because it's complicated.

Matter of fact, that's the number one reason sellers are selling out is for growth. That's another thing we might pull apart or not in this conversation. But I encourage you to do it. Don't only grow and go figure out and lean in or hire folks, us or others that can help you grow or just do the hard work to do it. Don't just do it for yourself to increase the valuation of the firm. Do it for your staff.

They will have better career paths. When you grow, you're able to hire more people. You're able to get more leverage out of your people. It's fun to be part of a growing firm. The career paths open up. It's good for your clients. The bigger you get, the more you can offer them, the more responsive you can be. But I'd say don't just do it for yourself, your staff, or even your clients.

Do it for prospects. Do it for people in your community. The more you grow, the more people you're saving, not only from a wire house or a hybrid firm, but you're saving them from themselves, right? The do-it-yourselfers are another monster that's in the marketplace. You want to save these folks and help guide them on growth. Sorry, you touched on a passion element. I'll pause here.

Yeah, I'm with you in terms of just the importance of organic growth. And you mentioned this phrase, economic complacency. And I wrote an article a few years ago, basically with that idea. I didn't use that phrase.

but the way I looked at it was generally speaking, people are going to rise to their level of comfort. And if you think about you and I are old enough to know what the model was like back in the day when it was a commission business. So you wake up unemployed every morning until you make your first transaction. Then when the AUM model comes along now, all of a sudden, if you work really hard for a few years and you get a hundred million in assets under management at 1%, and maybe you personally are taking home 30 or 40% of that,

Now you're making $300,000 or $400,000 a year, almost guaranteed, as long as you don't screw it up, because we have about a 97% retention rate in this profession. And so with markets going up, like you say, 6% or 7% per year on average. We have some clients that die and assets go and some clients leave, but we have existing clients bringing new assets, so on and so forth. So I'm almost

I'm almost guaranteed if I just hang in there and do a decent job, I'm gonna grow pretty decently and make a pretty good living and clients like me and I like them and I got a pretty good life. So why am I gonna work harder

to make even more money when I've got a pretty comfortable life. So I think the idea of the economic complacency, I think has been a big piece of it. So I totally agree with you there. The other thing that I find interesting too, and what you said is so many people talk about how this is such a big growth industry. And certainly part of the growth is simply a shift from

people leaving the wire house model to moving to the independent model. So that's certainly caused a market share shift in who's got the assets. So that's part of it. But like you say, we're down to maybe low single digit growth, which is about what GDP growth is. So then I guess my question is, as much as you and I and everyone listening to this would love to have everyone out there have access to a professional financial advisor, because we know

the impact that they can have on a person's life. The reality is it's not inexpensive to work with an advisor, right? If you have a million, $2 million a year, you might be looking at 10 or $20,000 a year that you're paying your advisor. So I'm just wondering if when you talk about the more we market, the more business we're going to bring in, obviously that makes sense.

Does that just mean it's really hard to convince a consumer that they need our services because we have to put so much into marketing to bring in that incremental new client? Are we not doing a good job of trying to explain what is the value of a financial advisor? Does it come down to something as simple as that?

One could say, hey, it's expensive to use an advisor. It's much more expensive not to. Totally agree with that. Yep.

is the planning element. Thinking not just, gee, how do I make sure I have enough money for my son who's going to college or my family or retirement or this or that. But it does make you think when done right. And I think the REA community overall does this extremely well. Thinking about the future, what's your priorities? Engaging you with your spouse and having that conversation and realizing how precious life is. And if something happens, what your plan B or C is. So much value and power in that. So I think, yeah, a few layers, I think,

One really needs to understand that and how to articulate that. I think the good news, Steve, good news, bad news. Good news is most founders can tell that story and sell it, right? They're really good at that.

The bad news is they were never trained to train people on how to tell that story. So it's not uncommon. You probably hear this as well. You're chatting with a founder and they're like, yeah, next generation are these junior folks. They just can't bring in the business. They're not good at selling. And then you pause and you politely say, and have you spent time teaching them that? And then it's a different conversation.

I think we have an industry where most of these advisors came from a wire house or these great training places in many regards. And they were probably really good at relationship management. I'd say it's the core, often business development as part of that. And if they weren't great business developers, they probably figured it out when they had to put some food on the table and pay the mortgage when they launched their own firm.

But they weren't trained to be expert marketers. They weren't trained to teach people how to do what they do well. It could be in a blind spot. We'll probably talk about it a little later. They weren't trained in HR either. So these are folks that are figuring things out. So what I'd say is for those founders on the call, you have such precious knowledge here, this precious skill that you don't even realize you have.

And I encourage you to take time and examine that and think through how you can take time and then put it on the calendar. We'll talk maybe about human capital and part of that is coaching, which is an ongoing thing. It's not on a given Friday, taking an hour or two and talking about what you do and expecting them to get it. It's investing ideally on a weekly basis and helping them understand that role playing with them, helping them understand.

have that conversation the first time, have failures, et cetera. So I think part of this is the sales process of once you have a prospect in front of you, but a big part of this is everything that goes into getting that prospect there. Again, being a nerd, over time, we've seen about 50% of new clients for an RAA come from client referrals. It was about 52% a couple of years ago. And then it shot up to 58%. And I was like, hey, let's not high five each other.

No one got better at bringing in more referrals because 88% of advisors do not ask for a referral. I think it's 88.8%.

So it's not that we did it better. It's unfortunately that complacency, that economic complacency drove down every other way to bring in clients that the clients who were never being asked to bring in referrals anyway, kept telling their friends and mentioning it. So that one piece of the pie didn't shrink as much as everything else. The good news is now the marketing is coming back a little bit. What I'd encourage folks to realize is this precious skill that they need to impart, but then also getting smart about how you're feeding the funnel and

We have a growth diagnostic. It's free, so I'm not pitching anything on the podcast here. But if you go to our website, we have a diagnostic, and it takes probably 15 minutes, and it's probably 25 questions. And by the end of that, you get a score, and it's dynamic of what your growth score is. So every time, you know, you do it tomorrow morning, it's going to change, and the one after you, it's going to change again. But more importantly than that one score, which might be alarming or good news, is we also score five stages of the life cycle of a prospect.

And then you start to know, are you not getting enough in the top of the funnel? And it doesn't matter how good you are at positioning or selling or closing, et cetera. Or is it the wheels fall off when you start positioning your firm? So, you know, even one layer like that, because your listeners, if they haven't done marketing for a while, it's so overwhelming. I say, just pick one lens and then start focusing on that. That at least creates some clarity.

that this is the weakest link and I need to focus on this first. You want to focus on your weakest link when you look at business development or marketing, unlike your greatest strength when you look at human capital. I think there's a number of factors in there for sure. In terms of the other factors, so we know organic growth is a big key. Other things like having the right team in place, having the G2 in place,

Things like a great client service model that is consistent. Agree with those? Are there some other factors that advisors should be thinking about? And how far in advance of a potential transaction should we really, we should always be focusing on these things. But particularly when you're thinking about a transaction, how far in advance should we really get serious about improving in those areas? Yeah, yeah. We get so excited about some of these topics, we forget the overarching thing, which is evaluation. Yeah, so a couple of things. I think the sooner that you start, the better, right?

Invariably, when folks start working with us on a sell side, the first few weeks, they're like, man alive, why didn't we hire you like two years ago to start cleaning up the house? It's like you're selling a house, right? And it's like, okay, we got to get the line shaped up. Let's rip up this carpet. Whoa, we got beautiful wood under here. Let's clean this up and all those things. Ideally, you live in the house a little bit before you sell it as well when it's in this beautiful shape. And similarly with an advisory firm, we sometimes coach folks, run your company like you plan to sell it in five years.

Even if you never sell it in five years, you are going to have a more industrial strength machine with higher profitability, fewer risks, et cetera. Back to valuation. There's three categories that drive every factor within the valuation of a firm. And there's a myriad of different factors, but all three categories. It's the growth of the organization. It's the profitability of the company. And it's the risks associated with the firm. Quite literally every factor.

valuation component will fall into those three categories. So we've talked about growth. And the second one is profitability, less sensitive, again, being a nerd for every 1% margin that you increase, you'll get about a 2.1 increase in the valuation of the firm. And let me, I want to ask you about that. If I could interrupt for a second.

You're probably familiar with this. In Silicon Valley, they came up with this rule of 40 some years ago. And the idea is simply that if you take the growth rate of your business plus your profit margin, it should add up to 40.

And so the idea is if you're growing at 35% top line, then you could have a lower profit margin because you're probably reinvesting in growth. So a 35% growth rate, 5% profit margin, there's your 40. On the reverse, if you're growing at 5%, then you may need a 35% profit margin because your cash count. And then a few years ago, I took that concept and really applied that same principle to an RIA firm where if you're growing faster,

and someone wants to buy you, they're probably going to be okay if you have a lower profit margin because you're probably putting in more than 2% of your revenue into marketing to grow. So how do you think about the relationship between faster growth and lower profit margin versus slower growth but higher profit margin when it comes to valuation?

Yeah. Great thing to touch on. Mark Diversion, someone that I have the world of admiration for. He presented at our Elevate a couple of years ago. He's presented again in Nashville in two months, but his topic back then, and he has these great titles all the time. What was it? Growth is a silent killer, I think is what it was, which underscores exactly what you said. Matter of fact, sometimes folks will come and they'll say, look, Dave, we're growing really fast. Our margins are high and they're expanding. And

And I stop them there. I'm like, okay, well, we might have a problem here. Because if you're growing really quickly, especially as an REA, your margins should be compressing.

You need to hire ahead of the curve and it's going to depend a bit. We can talk more about it on the side of the firm, but especially if you're a smaller firm, those margins should be compressing pretty quickly because it's a big step function each time you hire someone. The employees are going to be about 66%, 70% of the expense structure. And if you're growing quickly, those advisors that you need to hire are really expensive. So each time you hire someone, it really ramps it up and you will understand

the potential value of your company and even risk the near-term future of the company if you're not appreciating

appropriately hiring and running your company ahead of the curve of where you're going to be. A good ratio is probably 75 clients per advisor. And if you're growing really quickly, you're going to have a day where you're just starting to erode your client experience and you lose this precious 97% retention rate that we have. Now, as firms get bigger, there's more of a cushion in terms of that downward pressure on profitability when you grow quickly. But

But I'll have to play around with that 40%. It feels somewhat right in terms of metrics. So I think in good tools like that can allow someone as they're thinking about valuation to think, okay, growth is important. Profitability, a great health check for an organization. Sometimes firms too say, hey, we have 60, 70% margins. This is going to be great. And we say, yeah,

guess what? Those are really high margins. Some buyers are probably going to say, are those margins too high? We will work with that client to say, you know what? It's not going to behoove you to try to sell your firm when you're too light on the management team or the advisors, et cetera. You really want to

Back to your question on valuation, ideally you started early and you can grow and run a firm in a very methodical manner so that you're not hollowing out and having extreme profits, which are inappropriate to the firm. You're really running this firm like a machine. The other thing you want to look at, I've talked a little bit about the growth, a little bit about the profit and the health, the expense structure, and you want to have solid profits and ideally profit expansion opportunity when you sell.

The other thing is the risk side of the equation. And the risk is both the risk of the company itself, as well as the risk of the transaction. With our DCF, we have a 30,000 cell discounted cashflow model to value these firms. Really this elegant tool. I'm a nerd, so I love Excel when it's done right. But literally as we go through, we're valuing and we're like, hey, by the way, your retention rate

at 96% is bad news. It's not only 97% versus the 97%, but your peer group, guess what is 98%. So you're two percentage points off. We're going through line item by line item. Your growth trajectory is in the top decile or the bottom quartile or whatever else. So all these rich things that we're comparing them to as we go,

But back to that valuation model, it's a discounted cash flow model. So we want to discount future cash flows back to today. And that's because there's risk associated with those future cash flows. That risk we've nerded out and we've created 48 different risk factors in terms of the risks associated with this organization. So one of the things I'd say is, you know, if you're thinking, hey, we want to sell two months out, whatever it is, what it is, two years out, five years out, etc.,

Step one would be getting a valuation. Us or someone who does like a really deep dive and just get to know yourself, right? Invariably when people get valuations done by us, they're like, you know what? I look at my company through a different lens now. There's just different metrics and KPIs. I just didn't think about it the way I do now, which is so powerful and such a great compliment. But going through that valuation process,

You know, you're going to see, and we're going to be pointing out your strengths as well as your weaknesses and hey, you're strong here, but this is really, you got a leaky bucket here. You got to plug this hole or your people are way under market and you're at risk of potentially losing these critical people in your company. Whatever it might be, it's going through and that valuation puts you in a position to say, okay,

What do I do next? We have a module two that says, okay, what do you do to optimize the value? What do you do tomorrow morning and next week and next month and two months from now? What's the long-term plan and how do you go do that? In either case, if someone's thinking about selling years out back to that house and fixing the yard and pulling up the carpet and shining up the wood floor, valuation is step one. And then you're in a position to really carefully go through and think about what makes the most sense for you to optimize the value of your company and

in a way that's going to be good for you, your clients, and your staff. I want to talk about the profitability again for a second here. I've seen firms where they have high profitability because their average fee is significantly above industry average. I've seen other firms where their average fee is significantly below average around the industry. So how do you think about that from a valuation standpoint in terms of, let's take a firm that has...

an average fee that's maybe 1.2 or one and a quarter when across the industry, it may be it's 1%. As a buyer, are they going to look at that and say, wow, this is a highly profitable firm? Or are they going to maybe discount that a little bit by saying, oh, there's going to be pricing pressure at some point where those prices are going to have to come down. And then on the reverse,

The firm that's below average, is a buyer going to say, oh, here's a lot of opportunity to raise prices after we buy them. So maybe we can pay a little bit more because we know we got a lot of room in there to raise prices down the road. How do you think about that? I'll start with the first one, which is the fees are higher than average, right? You know, one good thing you're demonstrating, you're making great revenue and profits.

And that's either justifiable because you are doing some really neat things or gee, that's congratulations. You ended up pricing these firms high and it's going to depend. We don't want to say 1% is the right number, et cetera. For really small end clients, it might be appropriate to be higher or whatever else. Devil's in the details. So part of it is thinking through and then part of it is thinking through the sale. So the sale, most buyers think,

Many buyers over time are going to need to have a harmonized fee structure. So you can't have a national footprint and national advertising and then have Steve whose fee structure is completely different, right? So that'll either be, hey, when you sign, fee structure is going to have to change.

And good news, your clients are going to be happy because their fees are going down, or that's going to happen in two months or two years, or sometimes there's a three or four year window. If it's three or four years, then it shouldn't impact the valuation. In some cases, the buyers, and part of this is negotiation too, and sometimes it's ironclad, the buyers are going to say, tough cookies, that's real money, and it

Pricing, I'm glad you brought it up, Steve, because it's so sensitive to the profitability of a firm. And others are going to be able to be flexible on that. So I would not encourage any of your listeners to go cut their fees because they need to sell. Now, that's a good problem to start with. And ideally, there's a path to justify those fees and that structure and even some segmentation that can occur within. On the other side of the continuum where someone's charging too low a fee,

This is just, as a consultant, like just a painful thing to think about because it flows straight to the bottom line. For every dollar you're undercharging, it's probably $4 in profitability or $4 of margin, right? It just adds up pretty quickly. Or it drops all the way to the bottom line. I should do it in percentage points.

for every 1% that you're charging more or less. So it's interesting. We've seen this happen a couple of times, but it still comes to mind. One of the first engagements we did when we launched Avonco, because people know this is the investment bank, like we're arguably the most active bank in the space. It's really us and one other firm that's doing all the transactions. Everyone's doing like a third of what we're doing. And

And Barron's was kind enough to call me the REA M&E guru. But we do way more consulting than we do investment banking. Like I'm trained as a strategy consultant back in the day. We do consulting work on a variety of things, including fee structure. One of the first ones we worked on was an ESG firm, and they were focused on impact investment.

and their fees were way low. We did evaluation and we're like, "Hey, by the way, your fees are really low, way below industry. Here's some data to back it up, something to think about." We finished the engagement. They're like, "What should we do?" Guys like the blinking light here is your fee structure. And this is how every dollar there flows to the bottom line, et cetera. Now it's interesting the psychology that you're trying to get someone to increase their fees, because they can see in black and white just the hypersensitivity of this element.

But for people to go and ask for a higher fee, if you're contemplating doing it, it's going to be a lot of work for you to help rationalize that, not just to your clients, but first your staff, help them understand why it's appropriate to charge more than even do role playing and coaching to have that conversation and play the good cop and then the bad cop, et cetera, and get them in a chair. And finally, we had to even show guys, you're not only below market because they're like, they'll just leave. Where are they going to go?

You're already cheaper than everyone in the marketplace. And oh, by the way, guys, your clients love what you're doing. You're doing ESG. You're helping the world. They want to pay a premium. They're willing to pay a premium and you're at a discount. But I would say it's not a willy nilly decision to make. It's a critical decision to make. And I can tell you the answer right now. You should increase your fees, but then you need to steel yourself and be really thoughtful about how you do that because your staff is not going to be happy about it.

Yeah. And it's interesting over all the years I've been working with advisors, I've had more conversations about you're too low and you should consider raising your fees than I have with you're too high. And that's probably going to erode over time. It's people in this industry. I think the natural, one of the things I love about this industry is it's really good people that are doing good things. So I'm not shocked. Matter of fact, yeah, we're the same thing. More where there, that's the challenge too, that we have with profitability is many in this industry don't want to say no. So

So they end up providing too many services, especially the ultra high net worth. And the next thing you know, your expense structure has outstripped your revenue structure and your margins are getting compressed. Yeah. One final area I want to touch on here is talent. I know you've done a lot of work in this area. Another topic that there's been a lot of talk about in the profession about is

We've got to retain talent. We've got to find talent. We've got to grow talent. What are some of your best thoughts, your best insights here for RIA leaders that are trying to do a better job attracting key talent and retaining key talent? Attracting and retaining. And then I think the rich stuff is what's in the middle too. Part of it is a few things. I think A's and small business owners are a little reticent to spend money on a variety of things, including hiring. We just...

for the first time, use our own recruiter. We need a president of the company. We decided to hire, in this case, Hydric and Struggles to go find someone who's going to really sit in that chair and do a great job. So I think that's one thing to contemplate. The

The power of using a recruiter too, and you got to be careful. And clearly this is for a higher player. This is the COO that you want in the company that many of your listeners are probably crossing that transom going from overseeing clients to hiring someone who's professionally managing the firm, spending full time. Those are the types of firms that can be valuable. Other recruiters are just focused on breakaway brokers and bringing them over, not what most advisors need.

I think a few things, taking it really seriously. Don't just have a junior person go out and bring them in, spend time and energy being very disciplined in terms of how you talk about that job profile. Just don't take the one from last time, which might've been four years ago, update that, create clarity. Look at the story, how you're telling your story. A lot of today's employees do want to work for a firm with purpose.

So if you don't have vision, mission, values, purpose, or if you have them and they're dusty, revisit them, engage with them. That's really a great starting point to get more out of your people too, connecting them with a purpose. And we have such a glorious purpose in this industry. We're helping U.S. families and individuals. So really engaging with that, the differentiation, being able to tell a really good story about this organization.

And then we might talk more about it, performance reviews, even incentive compensation structure. Part of the power of that when we do that work is to help people really understand what the job is in great detail and being able to describe that to that potential candidate, including the most important elements of the job and why they're most important.

I think that in the old adage of hire slow, fire fast is really important. We've seen some of our clients, when we do a two-a-day bone call, go beyond just some interviews and even do some testing. It can be personality testing. It can also be, hey, craft a plan that looks like this. You don't want to create a lot of work for someone. Conversely, you want to see their work output. So I think those are all things that can help ensure that you hire really good people.

Yeah. And I think one thing I would add, I think you perhaps touched on this a little bit, is people want to know what their career path could be. And so I think the more clarity that you can provide, whether it's a new advisor that you're trained and it's okay, what are the different levels that I can go through to maybe eventually be a partner of the firm? Are there certain milestones I have to meet, certain educational requirements, certain business development requirements? What are those? So at least I know that

what those markers are that I can strive toward to know what my next promotion is going to be. And of course, it's not just the advisor side, it's the client service side, it's the operation side, every aspect of the firm, everyone should really have a career plan. And that leader needs to be sitting down with their team members, talking about that on a regular basis, because I think that's

You might call that sort of the soft part, but it's really the hard stuff. And most advisors don't want to do that kind of work because that's not why they got into the business. But the reality is if you want to build a good, solid, great firm, those are the kinds of things that you're going to have to do or someone on the team is going to have to do because people want clarity about what do I need to do to keep moving forward in the organization? And if you're not providing that, they're going to go somewhere else. They're going to look around. They're going to

Find some other company that will make them some of those promises or show them what the path is. Yeah, yeah. I think you've touched on something so critical and you're spot on as well beyond the hiring side. It's your current employees. And it's not just you're going to lose them where they may and will lead, but the engagement that you have while they're at the company is just going to be night and day. That career path, coaching on that career path, not just what it is. And if you don't have that

Please start creating it, being able to articulate that and then be rooting them on, helping them get to the next level, having not just those, hopefully not annual reviews, but even quarterly reviews and weekly or biweekly coaching meetings to say, hey, you know what, to get to that promotion, we identify these three things. I've been thinking about it. This is how I can help you. You will see your people blossom and flourish.

become more fully engaged in the work they do. And I think, again, connecting it back to purpose. The reason we're doing this is it helps the company do these things that achieve this result. So absolutely critical. And you said it yourself too, Steve, the softer stuff is the harder work in many cases, but that hard work yields great returns.

Absolutely. Well, David, this has been fantastic. I could talk to you for hours about these topics, and I think we've just scratched the surface on some of these for sure. But if folks want to stay connected to you, what's the best way for them to stay in touch? Sure, absolutely. You can email me directly. I tend to vector things to people that are smarter than me within the company in some cases, but don't hesitate to email me directly. David.DeVoe at DeVoe-Co.com. DeVoe-Co.com. I'm happy to hear from anyone.

All right, that's all for today. Make sure you like and share this podcast through your favorite social platforms. And for more great podcasts, visit us at barons.com slash podcasts. Take care and be safe. Discover Capital Group's distinctive approach to investing with the Capital Ideas podcast series, where we go behind the scenes with portfolio managers, analysts, and economists as they navigate today's markets. Available wherever you get your podcasts. Published by Capital Client Group, Inc.