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Schwab: Valuations of Independent Firms Higher Than Wirehouses

The cash flow and enterprise value of an independent advisory are better than a wirehouse.

Seventy percent of registered investment advisors who have gone independent in the last seven years say their revenue has increased since making the transition, according to a recent survey of 67 RIAs by Schwab Advisor Services. During a panel session discussing the survey results on Tuesday, Shirl Penney, president and CEO of Dynasty Financial Partners, argued that the economics of going independent—in terms of both cash flow and enterprise value of the business—are better than what an advisor would get at a wirehouse.

“Advisors are getting educated on that reality, and we’re seeing more and more teams coming to us and saying, ‘I want to retire in five, six, seven years. I’m going to transition, build my business out, and then ultimately monetize it in a much more tax efficient and profitable way on the independent side.’”

The average advisor on the Dynasty platform has gross income of 65 percent. Fixed costs, including staff and real estate, are typically 15 percent, while variable costs are typically about 20 percent. Assuming the average advisor pays himself 35 to 40 percent of compensation, that leaves 25 to 30 percent in net income. Wirehouse advisors might have gross income in the low 40 percent range.

The enterprise value is also higher, Penney says.

“The market right now is red hot in terms of the valuation for these RIAs,” he says. “You’re looking at seven to eight times EBIT.” 

Take, for example, a $5 million producer. At a wirehouse, he will get 150 percent in earn-out at retirement, or $7.5 million, all W-2 taxed. So if you’re in the 50 percent tax bracket, you’re getting $3.75 million.

But if that same advisor goes independent and making 30 percent in net income, that’s $1.5 million of net income per year. If you put a conservative multiple of seven on that practice, they could sell for $10.5 million, taxed at long-term capital gains, or 30 percent. “You’re walking out with $7.5 million,” two times more than at a wirehouse.

Tim Oden, senior managing director, business development, Schwab Advisor Services, said advisors want to fund their standard of living, so many are trying to figure out what they can do to manipulate that multiple positively.

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