As retirement nears for aging wirehouse advisers, many are contemplating how they can cash out. And they are bumping into a trend that is sweeping across the industry: independent practices can sell for a higher value than wirehouse practices that are transitioned to other wirehouse advisers. One senior marketing executive at a major custodian calls it an arbitrage among platforms.
It's no secret that wirehouses don’t pay nearly as well these competitors when the endgame nears. Multiples on sales of adviser practices are higher for both RIAs and IBDs compared with wirehouses ― and taxes are lower too because the sale of an independent practice is taxed at the capital gains rate.
So, if you're a wirehouse adviser looking to go indie and retirement, which independent route is currently the more lucrative? The answer depends partly on the seller's business mix and the model.
RED HOT MARKET
Here’s why RIAs may have the upper hand. Cash flows from fee-only businesses are deemed to be more predictable and less prone to customer complaints. For an acquirer, a fee-based practice is also more of a plug-and-play experience. Imagine buying the practice of an adviser who was primarily a stock trader. Anyone who buys that practice would need to replicate the seller’s stock-picking skill; the buyer would also likely be chained to their desk during the day to execute the successful trading strategy.
Most buyers favor fee-based practices because they can be serviced with just periodic client meetings. Wirehouse advisers who sell their businesses to firms that specialize in these types of acquisitions ― called consolidators ― typically get one-and-a-half times gross for transactional businesses and up to two-hand-a-half times gross for fee-based businesses.
Dennis Gallant, president of the financial consultancy firm GDC Research, points to another key factor in the superior valuations for RIA practices: "RIAs have a broader and more flexible base of potential buyers." This includes other RIAs as well as consolidators, banks, and asset managers. These buyers typically buy only RIA practices.
Indeed, the market for RIAs has been red hot, setting records in each of the past four years according to M&A consultants Devoe & Company. Last year there were 142 RIA transactions, up from 59 in 2013, according to the firm.
A HELPING HAND
The sale of advisory practices at independent broker-dealers can be trickier. While IBD practices can theoretically be sold to advisers at other broker-dealers, it’s a more seamless transition for the client if the acquirer is at the same IBD. The accounts at IBD practices sold to advisers at other BDs must fill out new paperwork to reflect a change in broker-dealer and/or custodian. This can be disruptive to client relationships and increases the risk of investor defections. That's why it's important for advisers who join independent broker-dealers to choose firms that have in-house departments that can match buyers and sellers and help structure deals.
Transitions for clients tend to be smooth among RIAs because advisers and clients often don’t need to change custodians. Most large RIA acquirers are multi-custodial. That means that at least a couple of the most popular custodians are available at major RIAs ― companies like Schwab, Fidelity, TD Ameritrade and Pershing.
However, David Grau, president of the Succession Resource Group, says IBDs can offer distinct advantages that make them more valuable than RIAs. A hybrid structure means advisers can provide clients a more comprehensive set of offerings.
“Pure fee-only RIAs are not necessarily more valuable or profitable by default," Grau says. "While this can be true for larger ‘ensemble’ RIAs, for most the hybrid RIA affiliated with large national IBDs can be even more valuable and profitable because they have a larger pool of buyers and because the IBD may reduce their costs by handling compliance and passing along discounted prices on technology.”
Grau also thinks that the marketplace within the IBD channel is bigger because buyers are willing to switch broker-dealers in order to make acquisitions.
Clearly, advisers who want to go independent should choose the business model that works best for them. But there's one final caveat: Going independent is not for everyone. Most wirehouse advisers find that the turnkey business model works well for them.
For most, the distractions of managing and running an independent enterprise simply aren’t worth it. Wirehouse advisors still can do well transferring their assets to a younger broker at their current firm. But for those advisors who are inclined to independence, the financial rewards of selling your practice as an independent can be great.