The Market’s Been Good To Us. Maybe Too Good?
For the last 15 years, RIAs have had major winds at their backs. Market returns have driven somewhere north of 70% of new revenue, according to industry analysis. You didn’t have to work that hard to grow. Clients saw their portfolios climb with the S&P 500’s steady rise, AUM swelled, and fee-based revenue followed suit. Everyone’s happy—clients, advisors, and firm owners alike.
The Goldilocks market tailwinds we’ve had could be fading.
Asset prices are stretched (peak the Buffett Indicator), higher interest rates are settling into a new cycle, and industry organic growth is stuck at 2-4%. Firms that haven’t been proactively focused on organic growth and building businesses instead of just managing assets will hit a shock realization: the easy growth is gone, and they might even be shrinking.
Based on industry data I’ve seen, I would estimate 10% of RIAs account for 90% of the industry’s organic growth, think Pareto’s 80/20 rule but even more extreme. The rest are primarily coasting on market gains and client referrals here and there, betting the bull run won’t end.
What separates these cohorts of firms, the top growers from the stagnant majority? The fast-growing minority rely on a deliberate plan, not just vague ideas or rough sketches. Central to this, and the focus of today’s article, is their use of a fully functional financial model, mapping operational details to create a clear view of future financial outcomes and execute their strategy.
Most RIAs either skip this or only do it at the surface level. They aren’t deliberate about all it takes to drive the growth and scale they want, leaving them unprepared when a market slowdown stalls their progress.
Let’s unpack why a financial model fuels your firm’s growth and how to design one that steers your business into the future.
A Financial Model Isn’t Just a Revenue Forecast
Most advisors hear “financial model” and picture a spreadsheet predicting revenue and profit five years out. That’s part of it, but it misses the bigger picture.
A financial model is a dynamic decision-making tool that bridges how your firm operates today with where you want it to go tomorrow and beyond. It’s not a top-down guess based on last year’s numbers and some growth rate. The better way—a build-up method—starts from the details of your business: staff, clients, fees, everything. That’s what ties into the gap we’ve been talking about, moving from just managing assets to running a firm for the long haul.
It takes more time and effort than a quick top-down run, no question. But that’s why it pays off. You get into the weeds with questions like:
- Can we afford to invest in future talent next year without straining cash flow?
- What happens to margins if we shift from AUM-based fees to flat planning fees?
- How many clients can our current staff support before service quality dips?
- What’s our cash runway if the market drops 20% and fee revenue takes a hit?
- How does launching a new service—like tax planning—impact profitability long-term?
The goal isn’t perfect forecasts—no model gets it all right, and that’s not the point. It’s about clarity and visibility: knowing what drives your RIA, seeing the full lay of the land, and making choices with real data, not hunches. Do it this way, and it’s a tool you use, not just something you glance at.
Beyond Numbers: Operational Insight
With that model in place, it’s your operational playbook, expressed through financial figures. It breaks down income—advisory fees, planning fees by client segment—against expenses like salaries, tech, marketing. Each piece intertwines, and you can see the impact of every move, not just the first step but the second-derivative stuff too—like how a new hire today affects client capacity and then profitability later.
It’s also your guardrail with scenario analysis. Run different what-ifs—say, a market dip or a fee shift—and you’ll catch where revenue or costs might slide before it’s a problem. For RIAs, where AUM rides the market’s ups and downs, this kind of heads-up is a must.
Then there’s tracking KPIs to keep you on point. Look at revenue per employee, net new assets, clients per advisor, margins—benchmark those against industry standards to see where you stand. If AUM’s up 8% but net new assets are flat, you’re leaning on markets, not growing on your own. That’s how you stay focused on what counts.
What Should a Financial Model Cover?
If you want a model that’s actually useful, it needs to connect operations and finance.
At a minimum, cover these:
✅ AUM Growth Forecasts– Inflows, outflows, and market returns
✅ Revenue Projections– Advisory fees, planning fees, and other revenue streams
✅ Expense Forecasts– Salaries, marketing, compliance, software, rent
✅ Cash Flow Projections– When and how money moves in and out
✅ Hiring Plans– When you need new advisors and staff, based on client growth
✅ Profitability Metrics– Revenue per advisor, margins, overhead
✅ Scenario Planning – Base case, best case, worst case
But if you want to take it a step further, add:
✅ Compensation Planning– Advisor pay, profit-sharing, and incentives
✅ Equity & Succession Strategy– Future ownership structure and dilution
✅ Capital Expenditures– Future office space additions, tech projects, acquisitions
✅ Client Segmentation– Which client types are actually profitable
✅ Advisor & Platform Team Makeup – Seniority and experience levels of your team
Not everything has to fit in one big model. You can split it into separate pieces, like a hiring plan or revenue breakdown, that feed into your main financial model. Just make sure you see how it all connects. That’s what makes the build-up approach worth it.
How a Financial Model Drives Your RIA’s Growth
Without a financial model, you’re likely reacting instead of steering your business forward. The top firms use it to make decisions in real time, turning data into action. Here’s how it works in practice:
1. Hiring on Time, Not Too Late
Many RIAs wait too long to hire. By the time they bring someone in, they’re already stretched thin, service is slipping, and growth slows down.
A model fixes that.
Example: Say you’re growing by $150M in AUM per year. It’s not just adding an advisor for every $150M. Your model figures out if you need a client service rep to handle the load or a platform staffer for tech support, telling you when to hire so you’re ahead, not scrambling.
2. Prioritizing Profitable Growth
A financial model sharpens your focus on what drives real value, not just what looks good on paper.
Example: You might assume ultra-high-net-worth clients are your top earners. But modeling profitability by segment could show mass-affluent clients bring in more per hour, guiding where to double down and where to pull back.
3. Planning for Market Cycles
Most firms are only planning for one future. The smart ones plan for three.
A proper model includes at the very least:
- Base Case – Business grows at historical averages
- Bull Case – Faster client acquisition, strong market performance
- Bear Case – Market pullback, client attrition, slower new business
When the market drops 15%, do you cut costs, push harder on growth, or raise fees? A model tells you before it happens.
4. Making Capital and M&A Moves with Confidence
If you’re thinking about selling your firm, acquiring a practice, or raising capital, a financial model isn’t optional.
Banks, investors, and buyers don’t just care about your revenue. They care about how well you understand your business. A strong model helps you:
- Understand your valuation
- Show profitability under different scenarios
- Prove you have a scalable model.
Firms with models land better deal terms because they’ve got concrete answers, not just guesses.
5. Compensation That Actually Makes Sense
Most RIAs aren’t as intentional about their advisor pay structure as they should be, especially with talent getting harder to acquire these days.
Your financial model should sort out a comp plan that lands top people and keeps your financials sustainable. It can figure out how to work in more firm equity—advisors are pushing for it—while making sure profits and growth hold up.
Ask yourself:
- What happens to margins if we shift from a revenue split to salary + profit share?
- Can we afford to offer equity without hurting cash flow to reinvest back in the business?
- If we increase new business incentive compensation, how will it affect our financials?
Modeling compensation lets you discuss it with your team and clarify how it supports the firm’s overall health. This becomes even more critical when equity owners expect a clear view of the business’s performance.
How to Build a Model That Actually Helps You Scale
1. Use Good Data Your CRM, accounting software, and operational data should feed into your model. Bad inputs = bad outputs. Reliable data uncovers the hidden patterns in your firm’s operations, not just the surface-level numbers.
2. Update It Quarterly If your model is more than six months old, it means you likely aren’t using it in the way that it can truly add value. Adjust it with actual results and refine assumptions regularly. Frequent updates expose how shifts in your business or market impact your trajectory, not just where you stood last year.
3. Build It from the Bottom Up Don’t just project revenue. Layer in hiring, expenses, and client growth to see how it all connects. This detailed approach reveals the cause-and-effect relationships driving your firm’s performance, not just the end results.
4. Keep It Flexible Your assumptions will change. Make it easy to tweak variables and run different scenarios without breaking everything. Adaptability highlights how small adjustments today shape your firm’s outcomes tomorrow, not just a rigid forecast.
5. Get the Team Involved Engage leadership across the firm to refine areas of the model they touch, ensuring accuracy and forward planning, especially for annual budgeting. They don’t need the full model, just its relevance. Cover it in leadership meetings. Collaboration clarifies how each leader’s decisions ripple through the firm’s finances, not just their isolated contributions.
Bottom Line: The Best RIAs Are Doing This. Are You?
RIAs scaling in 2025 aren’t leaving growth to chance. They use financial models to manage hiring, pricing, client expansion, and market shifts effectively. Firms that plan forward grow faster and handle downturns better.
Without a model, RIAs risk stagnation or setbacks when markets soften. Adopt a proactive business-owner mindset, ready for what’s ahead. Build the model, update it, use it. The firms thriving today already rely on this approach. Will you?