How Elite RIAs Scale Through Smart Capital Allocation

Take a moment and make a rough total of all your household subscriptions: Netflix, Spotify, Amazon Prime and Hulu, maybe a gym membership or meal service subscription such as HelloFresh or Blue Apron. If you’re like most people, you’ll need more than the fingers on one hand. Welcome to the subscription economy – where revenue predictability is power!

If you're like most of you advisor peers, you already operate in one of the most powerful subscription-based business models by charging an annual fee on the client assets you manage. Your clients don’t pay you once – they pay you over and over again, year after year, based on the trust you’ve engendered, the service excellence you provide, and the financial outcomes you deliver. But here's the big question:

Are you treating your business like the subscription powerhouse it actually is?

Too many founders and leaders are stuck operating like rainmakers, not CEOs. They see the inflows, the growth, the profitability—but they’re still holding on to capital instead of putting it to work. Rather than reinvesting capital back into the business, they hold on to the lion’s share of profits, pay themselves excessively well, and fail to adequately fund the very things that drive long-term enterprise value.

Predictability is a Privilege – Use It Wisely

Recurring revenue gives you something most businesses can only dream about: predictability and strong confidence in future cash flows. You know your client retention rates. You know your margins. You have a clear picture of your average client size, growth rates, and AUM projections.

That puts you in a unique position – not just to manage what you’ve built, but to build toward what’s next. Over the past 20 years, valuation multiples for advisory practices have dramatically climbed – not by accident, but because recurring revenue model businesses (i.e., AUM-based fees) are durable, they’re predictable, and they are scalable. And this revenue predictability should afford you the courage to emulate some of the most successful firms in our industry – firms who don’t sit on profits but instead reinvest in their businesses. Boldly and with purpose.

Never forget that your capital is only as valuable as your willingness to put it to work! As CEO, one of your most important jobs will be allocating capital – deciding where to deploy your time, money, and people to help ensure the highest long-term return. The most successful firms we work with treat their business much like a portfolio; always looking to the future and asking themselves “where can we earn the highest return”?

The Capital Allocation Mindset

So, how do you go about shifting your thinking from firm founder to capital allocator? The following are some of the strategic investments that we consistently see elite advisory firms focusing on:

• Hiring experienced Chief Operating Officers (COOs) to help drive operational scale and efficiency. For more ideas and insights about when the time’s right to pull the trigger, read our “Why and When Should You Hire a COO?” blog.
• Standing up consistent, metrics-driven marketing engines. And allocating funds to targeted digital advertising, social media campaigns, and content marketing can help reach new clients and build brand awareness.
• Launching new service lines for niche client segments (e.g., addressing income variability and cash flow challenges for law firm partners) and entering new markets. Building expertise in specific areas, such as tax planning, financial aspects of divorce or business transitions, affords you an opportunity to build a reputation as an expert who caters to the unique needs of specialty client segments.
• Investing in leadership development to build future partners and owners. ‘Upskilling’ your team through training programs, workshops and new accreditations can lead to increased productivity, improved employee satisfaction, and a more engaged workforce.
• Upgrading software and hardware can improve efficiency, automate processes, and enhance the client experience. From practice management software to CRM solutions, online portals for clients, and tools for data analysis, tech investments can deliver tremendous dividends.
• Preparing now to serve next generation clients, women investors, and business owners who are getting ready for major liquidity events. Demonstrate a commitment to each client’s mission through a values-driven approach – helping to translate personal values into actionable goals that will foster greater trust and stronger connections.

And they’re doing all these things before private equity or market momentum demands it. Because waiting to invest isn’t strategy – it’s inertia.

The Opportunity in Front of You

Private equity is flowing into this space in a big way. Sovereign debt funds, pension funds, and other big-dollar, long-term capital partners are entering the market. And strategic acquirers remain very active. With estimates of $1–2 trillion in capital looking for firms to back, this is a unique season of opportunity. But acquirers and investors aren’t just looking for size. They’re also looking for:

• Vision
• Infrastructure
• Scalability
• Leadership

In other words, firms acting like enterprises, not just practices. And that brings us back to the core question: Are you deploying capital like a CEO, or are you just hoping market returns keep carrying you forward? Because, if you’re relying predominantly on market growth to fuel future business growth, you’re not really a pilot – you’re a passenger.

I recently caught a Barron’s Advisor podcast discussion between David DeVoe (CEO of DeVoe & Company) and host Steve Sandusky. Devoe noted that currently, advisory firms are reinvesting in their marketing and/or business development efforts at a rate of around 1.5% to 2% of revenues instead of the 7% to 8% required to achieve meaningful growth. Dangling a powerful carrot, however, he also pointed out that for every additional 1% of consistent annual growth your firm can generate it will translate into roughly a 6% increase in the value a consolidator will pay to acquire the business!

So be bold. Build forward. Treat your advisory business like the scalable enterprise it is – because the next generation of great firms and great leaders aren’t waiting for market momentum. They’re creating it.

Advisor Questions From This Article

1. What percentage of last year’s profits did you reinvest into the business?
2. Are your current investments aligned with your three-year growth vision?
3. Where are you under-investing – and what might that be costing you in enterprise value?
4. If a private equity partner evaluated your firm, what would they want to see more of?
5. Are you leading like a capital allocator – or simply as an owner-operator?
   

About ClientWise LLC

ClientWise is the premier business and executive coaching firm working exclusively with financial professionals. We specialize in helping clients optimize growth and maximize revenue by engaging as a knowledgeable partner in accomplishing specific and significant business results. Our full-service coaching program empowers financial advisors, wholesalers, managers and executives to enhance performance through customized, action-oriented solutions based on each client’s specific vision and situation.

Our certified coaches are members of the International Coach Federation (ICF). They adhere to ICF’s strict code of ethics and have the experience and insight to work with you on the unique challenges and opportunities you face each day.

Drawing from an in-depth knowledge of the financial industry, ClientWise’s mission is to professionally develop industry leaders and consistently raise the bar for industry service, commitment and integrity. Simply put, our singular focus is to help you get clear, get focused, and get results.