In this episode, Ray Sclafani introduces a critical metric that leading wealth management firms—and the private equity firms evaluating them—are using to assess the health and enterprise value of their businesses: the Rule of 40. Originally born in Silicon Valley to evaluate SaaS companies, this simple but powerful formula (Revenue Growth % + EBITDA Margin %) has crossed over into the RIA world and become a litmus test for intentional, sustainable growth.

Ray breaks down:

• What the Rule of 40 really means in a recurring revenue business like an RIA
• How to calculate it (with real examples from ClientWise client firms)
• Where it falls short if misused
• How the most forward-thinking advisory firms use it as a leadership, compensation, M&A, and strategy tool

Plus, you’ll get five coaching questions to spark powerful conversations with your team—and begin leading like a CEO, not just a lead advisor.

Key Takeaways

1. The Rule of 40 = Revenue Growth % + EBITDA Margin %, and if the total equals or exceeds 40, your firm is financially healthy.
2. Many firms overestimate their growth by including capital market gains or acquired AUM—only organic growth tells the real story.
3. Leading RIAs use the Rule of 40 not just as a metric, but as a strategic lens.
4. Tracking Rule of 40 over time and by business segment (organic growth, next-gen, core team) uncovers the real levers driving enterprise value.
5. If your growth is passive or your margin is inflated, the Rule of 40 exposes the imbalance and forces better leadership decisions.

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