According to Business Insider, there are one hundred and fifty financial terms every individual should know. While arguably a mere ten percent of individuals fully understand this list (and fairly so – it’s a long list), only two of the one-hundred and fifty terms should be top of mind for Investment Advisors. Those being,  

assets and profitability

While the handbook convincingly suggests otherwise – that simply understanding assets is enough when vetting a new potential home for your advisory practice, for example, assets under administration (AUA) can actually play a rather biased role. 

Over time, AUA has been artfully retrofitted to serve as a benefit to the firm, not the advisor. Some firms have succeeded in creating false pretences around what AUA actually means and this has given rise to poor-decision making amongst advisors. The up-selling of a firm’s assets under administration is not a rigorous enough measurement of firm health as there is no true depth to analyzing AUA on its own. Can you determine a firm’s financial trajectory based on assets? Or its ability to invest in additional infrastructure to keep the firm competitive for years to come? 

Today, many firms wear AUA as a badge of honour and often advertise it on social media and their website and while there is no issue with these activities per-say, advisors cannot forget about assessing other vital and key financial indicators – especially when looking to transfer their entire book of business to a new home. When we think about transitioning from one firm to another, a common occurrence in the wealth management industry and more recently from banks to independents – AUA has served as a misleading indicator. It’s been able to pioneer waves of advisor movement, only to temporarily enthral prospects and new advisors.

How to avoid being misled by shiny AUA’s?

To avoid temporary infatuation with a firm and instead get the best “bang for your buck,” utilizing a heightened level of discernment that is backed by quality examination of a firm’s profitability will help course correct and steer you in the right direction. 

Profitability

While commonly looked at as one and the same, AUA does not equate to profitability. 

At a first glance, independent firms advertising high AUA can be enticing but advisors shouldn’t misinterpret AUA for profitability. If you’re offered equity in a dealer with high AUA but low profitability, you’re likely selling yourself short. Low profitability deters dealers from providing proper infrastructure, quality back office support and so much more. Low-profitability firms end up spreading themselves too thin and a have a great strategy to cover this up. By flaunting their AUA to attract more advisory groups and “selling” themselves based on this they can continue claiming that they have “the best AUA in the biz.” And why? Because it sounds attractive and is the perfect bandaid to cover up their real financial situation. 

On the other hand, high profitability translates to a high probability of regular dividends being paid to shareholders – aka you – in addition to exceptional back office support, leading technological infrastructure, a plethora of resources and a long list of other items that are proven to benefit the advisor and the firm.

For most firms the global pandemic was a circuit breaker trigger. It demanded hasty overhauls to long-used legacy systems, inefficient infrastructure, and obsolete practices. Most firms were not ready for the immediate action that COVID-19 required and dealers who were not prepared in advance of this global event – especially from a technological point of view – likely have deeper holes in their bottom lines than anticipated. Dovetailing off of this very fact then, it’d be wise for established advisors thinking of transitioning in the near future to consider adding questions heavily weighted on profits to their evaluation list. 

“The value of a wealth management firm is based on 

forecasted cash flows NOT Assets”

 

As the company that coined the term retail-friendly, we also know what it means to be IA-friendly. AUA has been paraded around as the gold standard for too long allowing low-margin firms to get away with falsely advertising their benefits. This commonly used and incorrect discord is a huge issue and one which must be addressed by firm executives and industry leaders to spur real change and help advisors navigate the landscape with the appropriate tools to land them in the best possible position.

With now having a more clear understanding of the role that profitability should play in your decision-making before jumping ship and joining a new firm, here are some questions to help support your due diligence and evaluation process:

Questions Investment Advisors should be asking but don’t:

1. What do your financials look like?
2. What do the firm’s proforma’s look like?
3. What’s your gross revenue (breakdown-based vs transactional)?
4. What’s your EBITDA and run rate?
5. How much cash do you have in the till?
6. How about the share registry?
7. Show me all the agreements you have with your various service provides, carrying brokers, etc.

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