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