Wednesday, 28 February 2024 12:29

Clean Up Before Cleaning Out

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As financial advisors contemplate retirement or transitioning away from their practice, preparing their book of business becomes increasingly important. This preparation, sometimes called "cleaning up the book," is a strategic move to enhance the ultimate sale price of the practice and ensure the quality of care their clients will receive after they move on.


A typical client-level profitability analysis often uncovers a familiar pattern: the 80/20 Rule, where 80% of profits come from 20% of clients. However, at the lower end of the profit scale, some advisors discover that some clients are actually costing them money after they account for all expenses and lost opportunities of their time.


Such revelations are particularly significant for advisors seeking to transfer their practice to another organization. Top-tier firms, which prioritize client interests, are reluctant to acquire a practice with unprofitable accounts and certainly not at a premium.


This insight is crucial for advisors as it also allows them time to adjust the service set they provide their least profitable clients, thus improving the profitability of their practice. By doing so, advisors not only secure the well-being of their clients for the future but also justify a fair valuation for the practice they've worked hard to build.

Finsum: By starting early, advisors looking to transition out of their practice can improve their chances of a profitable succession by cleaning up their book of business.


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