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Does Your B/D Have Skin in the Game on Transaction Financing?

If M&A transactions and the financing behind them are handled like widgets on a conveyor belt, an advisor’s ‘partnership’ with their broker/dealer may not be as strong as they thought.

In the midst of the COVID-19 pandemic, independent advisors across the country are taking a step back to re-examine what it means to ‘partner’ with the firms that support them. Many advisor realize that getting through the current crisis will require a total alignment of interests between themselves and their broker/dealers. But long-term success will require that alignment to be even stronger than before, and to last over decades, not just years.

One highly effective way to gauge the depth of a broker/dealer’s commitment involves transaction financing. Acquisitions—whether executed as part of an advisor’s growth strategy or to facilitate a succession plan—represent critical inflection points in a practice’s growth, and can offer powerful opportunities to strengthen the relationship between a broker/dealer and advisor.

On the other hand, if these transactions and the financing behind them are handled like widgets on a conveyor belt, an advisor’s ‘partnership’ with their broker-dealer may not be as strong as they thought.

Here are some questions to keep in mind:

  1. Does the b/d offer transaction financing from its own balance sheet, or does it merely function as a middle-man connecting advisors to third-party lenders?

While a loan to finance a transaction is obviously not the same as an equity purchase, it nonetheless represents a significant investment in the long-term future of an advisor’s practice, with the lender placing some of its own capital at risk to support the advisor’s growth.

When the broker/dealer or wealth management firm itself is willing to extend this financing from its own balance sheet, it sends a powerful signal to the advisor that the firm not only believes in the advisor’s business, but that it is willing to ‘put its money where its mouth is’ in order to achieve the advisor’s vision.

Firms that serve as a referral service between their advisors and third-party lenders, on the other hand, miss out on a valuable opportunity to ensure long-term alignment of interests and increase the advisor’s level of engagement and trust with the home office.

  1. Does the b/d charge financing fees (if it’s lending from its own balance sheet), or ‘service fees’ for putting advisors in touch with third-party lenders?

This one is simple: Firms that view transaction financing as a profit center for themselves are not thinking like investors.

Where an investor would understand that they only succeed when the advisor succeeds, firms that charge incremental service fees for transaction financing—or referral fees, if they rely on third-party lenders—unnecessarily undermine the alignment of interests between themselves and their advisors.

Foregoing service fees or other markups can also be a strong indicator of stability, showing advisors that the broker/dealer or wealth management firm is able to extend transaction financing thanks to sound risk management and prudent long-term decision making—not because it’s trying to become a bank.

As advisors re-examine the landscape in search of firms that are positioned to serve as stable partners over the long haul, the question of how firms handle transaction financing fees can provide valuable insight.

  1. How involved is the b/d in the transaction diligence process, whether the acquisition is succession-driven or part of an advisor’s growth strategy?

Possibly the most important factor contributing to positive outcomes in succession-driven transactions is the fit between the retiring advisor and his or her successor. Many firms that offer succession planning platforms, however, take an arms-length approach to connecting advisors and prospective succession candidates, preferring to shift this function to online databases instead.

When it comes to strategic growth-focused acquisitions, as well, many broker/dealers provide their advisors with checklists to use in performing due diligence on the target practice, but refrain from involving themselves in the diligence process beyond the required compliance checks and basic questions about the target firm’s financials.

Firms whose interests are more strongly aligned with those of their advisors, on the other hand, are typically more willing to involve themselves closely in the process of identifying and assessing potential succession candidates to leverage their long-term relationship with the retiring advisor to ensure the practice’s success going forward.

They are also more willing and able to play a key role in due diligence for growth-focused transactions. While some advisors may find it unusual to have their b/d ‘kicking the tires’ for them on an acquisition target, they should actually find it reassuring that the firm supporting them cares just as much about the success of the transaction as they do themselves.

This unprecedented moment in our national history has caused many advisors to re-think the assumptions they have been operating under for years, not least of which is the meaning of ‘partnership’ with the firms that support them. As advisors begin to look at their broker/dealers’ support with a more critical eye, they can learn a lot about the strength of their partnerships by examining the firm’s approach to transaction financing.


Mark Contey is senior vice president of business development for LaSalle St., a family of firms comprising an independent broker/dealer, an SEC-registered investment advisor and a provider of annuity and insurance products.

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