WealthManagement Magazine

A Shopping Allowance: The Newest Recruiting Tool

If you need more proof that competition for top financial advisors is growing more intense, look no further than First Allied Securities. The San Diego-based independent broker/dealer recently announced plans to offer forgivable loans to any of its 500 advisors or new recruits who wish to acquire other financial advisory practices. Like every other firm, First Allied, which was acquired by Advanced

If you need more proof that competition for top financial advisors is growing more intense, look no further than First Allied Securities. The San Diego-based independent broker/dealer recently announced plans to offer forgivable loans to any of its 500 advisors — or new recruits — who wish to acquire other financial advisory practices.

Like every other firm, First Allied, which was acquired by Advanced Equities Company of Chicago earlier this year, is trying to gather more assets and attract top-producing reps. Offering a forgivable loan is a good way to get prospective recruits' attention. “We have some junior recruiters making outgoing phone calls, talking to advisors at other firms about joining First Allied,” says Mark Dransfield, president of the firm. “Typically that's a hard call to make. But when they're calling and referencing that First Allied will help with a down payment to buy a business, if we open up with that lead, we find that it's much easier to get that advisor to stay on the phone and consider us.”

In addition, the company says, the loan program is serving as an alternative to acquiring other b/ds — and a far more efficient alternative at that. “What we're doing is no different than taking our acquisition dollars, and saying, ‘Look, you double your business by buying another book of business,’” says Dransfield. “It's less expensive, the retention rate is higher and you don't have the integration headache.”

Dransfield says the strategy could add at least $13 million in production over the next year, or 10 percent growth. The program was launched in August; already, 42 of the firm's reps have shown serious interest in making an acquisition, he says.

The idea should catch on with other firms, says David Grau, president of Business Transitions, a consulting firm that runs a merger-&-acquisitions listings service. Business Transitions is partnering with First Allied in the service and providing advisors with the tools to make acquisitions happen. If the strategy catches on, it could prove to be a boon for growth-hungry financial advisors at independent b/ds, as well as for all those reps on the cusp of retirement.

More Money Down

After all, forking over the dough for a down payment is one of the biggest obstacles for acquiring firms today, says Grau. That's because demand for healthy practices is growing, and the amount required for a down payment is going up. The average number of interested buyers per seller listing has increased from 19 to 35 in the past five years, while the average down payment increased from 26 percent in 2002 to 36 percent in 2004, according to a recent Business Transitions survey.

Today, few b/ds offer a formal loan program for reps interested in buying practices, says Grau. And even then the loans are rarely forgivable. Dransfield was reluctant to talk about the program at first, for fearing it would generate copycats.

Many b/ds and custodians provide listing and consulting support for succession planning in-house, but only offer standard financing, or refer advisors to outside financial institutions for help. Waltham, Mass.-based Commonwealth Financial, for example, says it often provides loans to young reps who are buying larger practices, or to reps who want to buy practices outside of the b/d, since that brings in new assets. But, “these are the kinds of loans that you pay back,” says CFO Rich Hunter. San Diego-based Linsco/Private Ledger helps reps value potential acquisitions and structure deals, but says its reps usually get financing from local banks.

Dransfield says there's another benefit to the new program: Retention of client accounts is higher, and the costs are lower in a practice-to-practice acquisition versus a b/d-to-b/d acquisition. That's because the deals are generally between small, one- or two-man shops where the sellers are willing partners in the deal. Further, the way these small deals are structured — typically 55 percent to 65 percent of the selling price is paid off over three to five years — the seller has an incentive to make sure it's a good fit for his clients, he says. “The average retention rate is 96 percent to 97 percent one year later, and that's headcount,” Grau says. “If you measured it on a cash-flow basis, you'd probably exceed 100 percent in every instance. Especially in the case of RIAs and fee-only advisors.”

As part of First Allied's partnership with Business Transitions, advisors on the b/d's platform get free access to Business Transitions' listing service, as well as consulting support, and commissions are reduced to 2.5 percent from the standard 3.5 percent. After doing due diligence on the practice being acquired, First Allied provides a portion or all of the down payment on that practice. If the buying advisor stays with First Allied for a certain number of years, and produces at an agreed upon level during that time — metrics determined by the quality and size of the acquired practice — then the loan is forgiven.

“We expect most of those loans to be forgiven,” says Dransfield. “We'd rather not be out collecting the money back.”

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