Mar 23, 2022

InvestmentNews: How bear markets wreak havoc on succession plans

In his latest bi-monthly InvestmentNews practice management column, Scott Hanson posits about a possible reality that many advisors have been dreading: “Could this be the beginning of a prolonged bear market, and, if so, how will it impact my succession planning and the overall value of my firm?”

The short answer is, if you’re not proactive, it could get ugly.

Planning your succession? Hundreds of advisors are.

But the past is the past. And what your firm was worth six months ago may not matter today. That’s because recent market declines, and subsequent advisory firm AUM losses, are not dollar-for-dollar propositions.

From the article:

When the equity markets decline, as they have this year, they take the value of your firm down with them.

Sure, if you’re creating a succession plan right now, or a sale is imminent, you may still be able to tout your numbers from the end of 2021. But that window is closing fast; it’s more than likely your current run rate is what buyers will assess when calculating the worth of your firm.

But just how damaging is a bear market? Is an extended drop in AUM a dollar-for-dollar decline that parallels your firm’s value?

Not even close.

Let’s say you have $400 million under management with an average fee of 90 basis points. That’s $3.6 million in revenue. Now let’s assume you operate at a 35% profit margin. That means the business has expenses of 65%, or $2.34 million, resulting in a net profit of $1.26 million.

As an example, let’s assume your firm has 50% of its assets in equities and the market falls 30%. All things being equal, that would equate to a 15% decline in your AUM. So rather than managing $400 million, you’re now managing $340 million.

Scott Hanson, Co-Founder, Allworth Financial

Read the full article at investmentnews.com