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Investing in Independence: How Investors in Wealth Management Firms are Helping Wirehouse Advisors Make the Leap

There was once a time when investors were only interested in those already independent. But wirehouse advisors are finding these same capital sources may have an interest in funding their move.

With all of the changes we’ve seen in wealth management, one of the biggest shifts is in how financial advisors—no matter where they practice—are viewing the work that they do. Even the most captive of advisors recognizes that he is building, or has built, an asset with real enterprise value and that the decision around how and when to monetize it is worthy of serious consideration.

Yet monetization comes in different forms.

For example, a wirehouse advisor interested in monetizing his business has a few options: transition to a firm or broker-dealer “paying a recruiting deal” or signing on to his firm’s sunset program as a means of recognizing value prior to retirement.

But what of those advisors with a strong entrepreneurial bent who are seeking the maximum flexibility only available in the independent space—and are also looking for some meaningful transition capital to fund the startup of the business? Or those teams that require capital to fund the buyout of a soon-to-be-retiring partner?

Historically, advisors going independent self-financed a transition or potentially received some cash attached to a forgivable loan from an independent broker-dealer. Yet, as the independent space is continually validated by top wirehouse teams that made the leap, and coupled with the availability of best-in-class options for technology, platforms, and products—a multitude of capital providers and strategic minority investors have made their way into the space.

Similar to how “service providers” and turnkey platforms have broken down many of the barriers that advisors face when going independent—and recognizing the immense opportunity that the breakaway movement presents—minority investors are doing the same.

A Changing Conversation Around M&A

Usually the M&A conversation is reserved for existing independent business owners seeking a way to monetize their practice, gain scale, expand their service offerings or accelerate growth. Even amidst a pandemic, we are witnessing one of the most active M&A markets on record. And there is certainly no shortage of buyers or minority investors to deploy their capital into the space.

While these investors represent a popular category of buyers for independents, an under-represented discussion topic is how minority and non-controlling investors are relevant to wirehouse teams, leaving advisors to wonder:

  • Who are the investors interested in funding an advisor’s leap?
  • Why would an advisor choose to sell a minority portion of his business?
  • What are the downsides of selling equity?

Getting to Know the Investors

Who are they?

Investors include private equity funds, family offices, independent platform providers, asset managers looking to diversify revenue, CPA firms and even an advisor’s clients. These are groups that will invest directly in a firm by acquiring a minority or majority portion of the firm’s equity or underlying cash flow. Many advisors—especially those coming from a wirehouse—prefer this style of investor to a full-on acquisition because they are still able to retain control over things like brand, investment approach, client service model, technology platforms and the hiring of employees.   

Why are these investors interested in breakaways?

The trend of private equity and minority investors entering the space has accelerated. The big reason is that wealth management businesses offer many of the investment criteria savvy investors seek—such as annuitized and predictable revenues, scalable businesses, they require modest amounts of capital or are “capital light,” and operate in an industry ripe for further consolidation. This coupled with the impressive track records of investors – like Focus Financial Partners, Hightower Advisors, Merchant Investment Management and Emigrant Partners – have a proven roadmap for how minority investors can help accelerate the growth of its underlying investments. And, at a time when many advisors are actively trying to solve for succession and the momentum toward independence has never been greater, there is certainly room for many interested investors to enter the market.

What do they solve for?

Of course, investors provide capital in exchange for an ownership stake. However, access to capital these days is fairly easy to come by. So for an advisor to part with equity there needs to be something more they receive in return. The major benefit of an investor is their ability to help a business grow through its strategic guidance and its ability to source opportunities, structure transactions, and provide capital for M&A and recruitment. Although selling equity means initially reducing take-home economy, an advisor would consider such a deal if they believed they would grow their business far faster with the investor than without.

Additionally, succession planning tends to be one of the biggest reasons why someone might look for an investor. Often we see teams that are highly motivated to go independent, but have a partner or partners that are considering the firm’s sunset program, so they set out to create their own customized buyout plan and require capital for the down payment. Instead of waiting for the sunset deal to finish or signing a 9 to 10-year forgivable loan, these advisors would rather take on an external capital partner now, rather than delaying their move toward independence.

For a wirehouse team, other reasons include the opportunity to de-risk the transition, gain capital to invest in building their firm, make up for lost unvested deferred compensation, or have funds on hand to pay back the balance of a sunset program or recruitment deal.

What’s the downside?

Although accessing capital may be of the utmost importance today, the choice to sell equity lasts into perpetuity. This means advisors may worry about “capping their upside earning potential” or regretting having a permanent partner in the business once the immediate capital need is fulfilled.  

There is also the matter of deal structure: A business that is in transition is going to be worth less or receive a more “buyer friendly” deal structure than it would for an already existing independent entity.

Although investors are usually hands-off when it comes to day-to-day control, they do still have the ability to veto certain decisions—and depending upon the investor may have a timeline before they must monetize their investment which could mean finding a new investor, selling the business, or taking on debt to buy out the ownership interest.

Some advisors may view taking on an investor as a bridge too far. For them, it may make sense to take on a debt solution, a forgivable loan from an independent firm, or to self-finance the transition.

For any advisor considering the independent space, it can be difficult to knowingly forego a significant payday from a traditional firm or opt to delay a major monetization event until closer to retirement. And for many, while selling a portion of the business today is not ideal, it is sometimes better than the alternative of staying put, being locked up by a recruitment deal, or waiting the requisite time for a sunset program to lapse.

Taking on an investor offers a proven way to accelerate growth, creates a monetization event for a partner, and provides enough liquidity to launch a business—but it is certainly not the only method to achieve these goals. As the industry landscape has expanded and there are now more and more options, advisors have to be even clearer on what they are looking to solve for and what they are willing to sacrifice to achieve that goal.

Louis Diamond is executive vice president and senior consultant at Diamond Consultants, a recruiting and consulting firm for financial advisors and independent wealth management firms.


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