There’s an adage attributed to Jackie Kennedy: “The first time you marry for love, the second for money, and the third for companionship.”
Movement in the wealth management industry used to follow a similarly formulaic path: Advisors moved once for money, and then again for “love.” In short, even if an advisor had a fleeting interest in independence and had never monetized their business book, they likely would have opted for a recruiting deal from a traditional firm.
But industry students might notice an evolving trend: advisors, particularly younger advisors, are increasingly forgoing the middle step and moving straight to independence.
Why? Here are six possible explanations:
1. They’re fed up with the big firm world
It is not fair to paint all wirehouses or W-2 firms with the same broad brush. There are essential differences between even firms in the same industry category. That said, we certainly understand why an advisor who is frustrated with life at the big firms might feel that a wholesale “model change” is a better antidote to what ails them. Said another way, an advisor may view a move to another W-2 firm as a “lateral” move. Ultimately, they desire a greater degree of change.
2. They’re looking to gain control and exercise their entrepreneurial spirit
Economics often “steals the show” when it comes to advisor movement. After all, it’s flashy to read about hundred-million-dollar transition deals and M&A transactions. But for many advisors, money takes a back seat. The idea of going independent now is more about control and a desire for greater autonomy and freedom to serve clients and run their business as they see fit. That is, to think and act more creatively like entrepreneurs, and ultimately have the potential to reap greater benefits (more on that in #3).
3. They see long-term enterprise valuation creation as worth it
The most exciting thing about the independent space is that it has completely shifted the paradigm for financial advisors: they now rightly view their book of business as an asset with tremendous value. In other words, advisors in the independent space can sell their business at capital gains for an eye-popping multiple of EBITDA or revenue. Many advisors who choose independence over a traditional firm know they are leaving upfront money on the table. However, they believe that the ability to recoup in the long run via a higher payout and significant back-end monetization event via a business sale more than makes up for that.
4. They’ve run the numbers, and the recruiting deal isn’t all it’s cracked up to be
The wirehouses have successfully recruited advisors under the “forgivable loan” construct for years. All four wirehouses currently offer recruiting deals for top teams well in excess of 300%, so it’s easy to see why. That said, upon closer analysis, there are a few critical drawbacks to these recruiting packages:
1. They are taxed as ordinary income, making them far less efficient than other types of book monetization.
2. They typically vest/amortize over an extended period, often approximately 10 years.
3. Not all the deal proceeds are guaranteed, and sometimes as much as half of the total deal is tied up in “back-end” earnouts.
5. They want to move once and find their “forever home”
Make no mistake: moving is a huge hassle. For many advisors, the idea of doing so even once is hardly palatable, let alone twice. So, if an advisor knows they ultimately want to be in the independent space, it’s increasingly common to see them “rip the band-aid off now” and make that leap directly from a wirehouse or traditional firm.
6. The support infrastructure for independent advisors is as robust as ever
Advisors used to face an unpleasant choice if they craved change: either stay the course, explore another wirehouse, or perhaps launch their own RIA from scratch. However, the emergence of “middle ground” supportive independence models, ranging from supported IBD models to RIA platforms, has enabled advisors to have the best of both worlds: scaffolding and support with greater autonomy and control.
Let’s be clear: independence is not for everybody. Some advisors prefer the scale and brand names of the biggest firms on the Street. But, gone are the days when a middle step is necessary for advisors who ultimately want some version of independence. Excitingly, advisors now have the very legitimate choice among three quality options: 1) stay put, 2) accept a recruiting deal from a wirehouse or another traditional firm with the intention of moving again when the note is fully matured, or 3) leap straight to independence.
#Advisors #Leaping #Independence