Key Drivers In Your RIA • Financially Simple


Operational efficiency is often the key to unlocking greater profitability and improving the client experience. Yet, improving your RIA’s operational efficiency can be a challenge. How do you know where to begin? Fortunately, there are some key drivers of operational efficiency. Or should I say key perspectives? In today’s entry, I’m going to look at three perspectives to drive greater efficiency in your RIA.

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What is Operational Efficiency?

Simply put, operational efficiency is using resources like time, people, equipment, inventory, and money in an optimized way to serve the business to a desired outcome. You’re simply aligning the resources you have at your disposal to a a desired outcome. But what types of outcomes are we talking about? Well, throughout this series, we’ve spoken of the eight-figure exit. So, there’s a potential outcome. But operational efficiency could lead you to greater profitability, increased value, or even strategic moves within your firm.

With the understanding that operational efficiency can be the vehicle that takes you to your desired outcome, we need to look at the key drivers of that vehicle. Now, what I’m about to say may surprise you. Most business owners instinctively look to various metrics when they want to improve different areas of their businesses. However, for today’s purposes, we’re going to look at three key drivers. But here’s the twist… they’re actually just perspectives.

I know some of you are thinking, “Justin, what perspectives could possibly help my firm’s operations become more efficient?” Friends, I’m talking about the owner’s perspective, the team’s perspective, and the client’s perspective. Each of these can provide incredibly valuable insights that help you maximize your operational efficiency.

The Owner’s Perspective

Let’s start by talking about you. Friends, as business owners, we’re often driven by the numbers. As the owner of your RIA, you probably look to your firm’s EBITDA first when thinking of operational efficiency. Just to be crystal clear, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of your firm’s operating performance. According to Envestnet’s 2022 Trends Report, the median-adjusted EBITDA multiple on RIA transactions grew by 12% in 2021, reaching just under 9x. So, if you have a $1M practice, in terms of EBITDA, then you would have a $9M valuation. But what creates that “9x” position?

The multiple is a variable position. The quality of the business is what directly influences your firm’s multiple. In Nashville, there is a replica of the Parthenon. Yes, the famous structure that was built in ancient Greece. The replica is absolutely beautiful. There’s a very ornate roof that is supported by these massive pillars. We can look at the roof as EBITDA. Under that roof, there are operational things that drive up the value of your firm through that multiple. In fact, the firms that were surveyed in that Envestnet report saw a variance of about 16% in their multiples.

Investopedia reports that EBITDA margins of 10% or more are considered “good” For many businesses. Yet, if we’re looking at an EBITDA margin of $1M, that’s $10M in revenue. So, we can see that this doesn’t quite work in the financial advisory space. Therefore, we have to sort of reverse engineer our way into finding where we need to be in our businesses. So, let’s look at the profit margin. According to Investment News, 25% has been the benchmark for RIA’s profit margins. However, in 2021, RIA’s profit margins jumped to 30.6%. Therefore, it is possible to reach your eight-figure exit with $1.5M or more in gross revenue.

The Rule of 40

Simply knowing your EBITDA and profit margins isn’t enough though. You have to be able to measure your margins. But how? There’s a rule that’s pretty powerful in helping us to understand how a business operates on our journey toward the eight-figure exit. It’s called the Rule of 40. Basically, it’s a metric to evaluate a company’s operating performance.

The Rule of 40 states that a healthy company’s sum of revenue growth rate and profitability margin should exceed 40%. It suggests a trade-off between growth and profitability. For example, if a company grows at 30% year-over-year, it should have at least a 10% profitability margin. Conversely, if a company grows at 60% year-over-year, it can tolerate a negative 20% profitability margin.

Depending on where you’re at in your business cycle, you could generate a significant windfall in your business. In doing so, you could expect a negative profit margin, directly impacting EBITDA. So, in order to right the ship, you must bring your firm back into alignment with the Rule of 40. Friends, timing is everything when it comes to a transaction. Timing is everything when it comes to the owner’s perspective.


Another metric, EBOC (Earnings Before Owner’s Compensation), provides insights into the balance between taking profits out of the business and reinvesting in it. According to Fidelity’s 2022 RIA Benchmarking Study, the average EBOC margin for RIAs with AUM (Assets Under Management) between $250M and $499M is 62%, equivalent to roughly $1.167M. Monitoring EBOC helps determine if a business is extracting too much or too little from its operations. So, how do you use EBOC to drive operational efficiency?

Here’s an example from my own business. Because I knew the trajectory of the company, I was willing to decrease my compensation to that of a W-2 employee at comparable firms. Therefore, I was able to redeploy the excess back into my business to drive value. So, when we as owners, are looking at operational efficiency, it’s all about the value and profitability. But we’re not the only players in this chess game.

The Client’s Perspective

Examining the client’s perspective is critical to understanding operational efficiency. By focusing on the client experience, you can identify areas for improvement. Adam Mosely, Managing Director, Business Consulting and Education at Schwab Advisor Services, said, “Institutionalizing your business through technology and operations provides operational discipline, allowing you to maximize scalability, manage risk, and build a solid infrastructure so that you can reinvest time where it matters most—with your clients, protecting the trust that you have built. In my 20-plus years in this business, I’ve seen firsthand how hard advisors have worked to grow their firms and gain their clients’ trust, and I believe achieving operational excellence and managing risk is essential to helping you protect both.”

You see, we can learn a lot from the client experience in our firms. For example, what is your onboarding process like? Assessing the onboarding process and the number of steps a new client must go through provides insights into operational efficiency. For instance, top-performing firms, as revealed by the 2022 RIA Benchmarking Study, spent an average of 13 fewer annual hours to acquire a new client compared to other firms. The same study revealed that top-performing firms had an average cost of staff time of $3,704 per new client. All other firms averaged $4,160 per client. Think about that. If a firm acquires 10 new clients per year, that could be a difference of 130 hours and $4,560. Friends, that’s not insignificant!

Do Your Clients Feel Valued?

Regardless of your industry, there are always going to be low-cost providers. Walmart is a great example of this. They reduce their cost by increasing volume. It’s not that easy in the financial advisory space. Most RIAs can’t generate the volume that the wirehouses do. Therefore, you must focus more on delivering the “Nordstrom experience.” We’re trying to go above and beyond to deliver the best quality of service.

Folks, oftentimes we make this aspect of our jobs much more complicated than it needs to be. Creating operational strategies to ensure that your clients are receiving a personalized Christmas card, birthday phone call, or just a small gift to show your appreciation for their business can go a long way in making a best-in-class client experience.

Your Team’s Perspective

Finally, you must look at your team’s perspective. Friends, this might be the most important one of all. Your team has one perspective when it comes to operational efficiency… If it’s not efficient, we’re wasting time. A study by Zippia found that 89% of employees waste at least thirty minutes every workday. The reasons behind this wasted time include boredom, lack of interest in their jobs, and trivial interruptions. I challenge you to do the math on that in your own firm. The results should paint a clear picture of how operational inefficiencies affect your bottom line.

The same report revealed that 20% of workers waste time simply because they’re bored or aren’t interested in their jobs. Likewise, employees say that 80% of the interruptions they experience at work are trivial. Friends, one of my biggest pet peeves is being called to a meeting and realizing there are seven people in the meeting. It’s the height of inefficiency. So, your team can be a very strong indicator of whether you have inefficiencies in your operations.

Richard Branson once said, “Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.” Think about that. Did you ever think you’d hear a successful entrepreneur say, “Clients do not come first?” I’ll even take this quote a step further. If you take care of your employees, they will take care of your clients and they will take care of you. So how do we change? How do we drive operational efficiency in our firms?

Influencing Operational Efficiency in Your RIA

To enhance operational efficiency, you should focus on several key factors, from your team’s perspective. These factors include:

  1. Purpose: Clearly communicate how each team member’s work contributes to the firm’s strategic goals. Gallup research indicates that employees are 3.5 times more likely to be engaged when they understand the impact of their work on the organization.
  2. Appreciation: According to the 2023 Global Culture Report by the O.C. Tanner Institute, a highly integrated recognition program has a multiplicative effect. Moreover, firms with such programs experienced 9 times the employee engagement, 13 times the work product output, and a thriving culture 8 times greater than those who did not have recognition programs.
  3. Metrics: Measure the staff per revenue ratio to ensure the right balance of roles within the firm. In the 2022 RIA Benchmarking Study, that I mentioned earlier, firms typically add a new role for every $360K in revenue, with 1 revenue role supported by 1.3 non-revenue roles. Regularly assess and adjust these metrics to optimize resource allocation.
  4. Advisor-Owner Satisfaction: Keep in mind that as firms grow, advisors may face challenges that impact their well-being and satisfaction. It is important to identify and address factors such as workload and time allocation to maintain a positive working environment. In fact, firms with at least $2M in revenue also have a substantially higher frequency of “Struggling advisors” (those with a diminished sense of well-being) (13%), second only to the frequency of “Struggling advisors” at firms where revenue is less than $125,000.
  5. Embrace Growth: As a business expands, it may be necessary to outsource tasks like business development to free up valuable time for high-value activities. This reallocation of resources can contribute to better outcomes and prevent time poverty, leading to improved overall efficiency.

Wrapping Up…

No matter what stage of the business cycle you find yourself in, there are more than likely some areas where you can improve operational efficiency. Take some time to evaluate these three perspectives. They can help determine which areas to focus on first and enable you to drive your firm toward the eight-figure exit you desire.

Hey, I know life is hard. Trying to position your RIA to allow you to make the exit of your dreams can be frustrating. But it doesn’t have to be. By adding some perspective, you can drive operational efficiencies in your RIA to improve profitability, improve the client experience, and grow a practice that is valuable. Following these steps can help make your journey toward the eight-figure exit, at least, financially simple.

Even when you understand the way these perspectives drive operational efficiency, making the necessary changes is often complex and time-consuming. Reach out to our team to learn how we could help you facilitate this journey in your firm.

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