The Cons: These agreements are often consummated at less than fair market value because there is no competition driving up the price of the business. They also significantly lock up the next-gen inheritor for the life of the agreement (typically 5-7 years). Lastly, at the end of the agreement, the firm technically still “owns” the book of business, so what did the inheriting advisor really receive?
Option 2: Sell the business to a strategic buyer.
A quality wealth management business is like the holy grail: Everyone wants it. This certainly includes existing RIAs, many of which are backed by private equity. A “strategic buyer” is a buyer, like an RIA or other established wealth management firm, that also runs a wealth management business, meaning that the buyer would presumably recognize significant cost and operational synergies from the transaction. Examples include Creative Planning, Mariner Wealth Advisors and Beacon Pointe.
The Pros: Since the buyer has its own wealth management platform/infrastructure in place, a transaction of this sort allows advisors to offload many of the day-to-day responsibilities associated with running a business. These buyers often pay a premium for a quality book as well (and at capital gains treatment) since they recognize immediate purchase synergies from the transaction. These buyers often have deep pockets and are highly experienced at advisor transitions since they are often repeat acquirers. Most importantly for Gen 2, it takes the heavy lift off them in terms of paying Gen 1 for the business themselves.
The Cons: A transaction of this sort requires an advisor to sell the entirety of the business, meaning the seller loses operating leverage. Also, it likely means ceding some control in any or all of the following areas: brand, compliance, investment autonomy, marketing and operations. Lastly, the ongoing payout post-transaction is typically quite low for the selling advisor. The downside for the next gen in this scenario is that the business is now sold to the larger entity, meaning that the buyer won’t own any of the book and will have limited-to-no agency and autonomy over the future of the business.
Option 3: Sell the business to a financial buyer.
Not all buyers are interested in exerting control, influence and leadership over an acquisition target. In some cases, the buyer simply views a seller’s book of business as a sound financial investment. These buyers, sometimes referred to as aggregators, might purchase a majority or minority stake in the seller’s business, and they almost always mandate that advisors continue operating their own brand and maintain their own operational integrity. Examples include Focus Financial, Merchant Investment Management, Kestra Bluespring and Hightower Financial.
The Pros: These firms are a great fit for advisors who want to maintain maximum autonomy while simultaneously unlocking liquidity. Since advisors can keep some of their own equity, they may keep some operating leverage in the business. Plus, they may get a second bite of the apple down the line when the buyer has a liquidity event. That said, a transaction of this sort is about the seller keeping control while still unlocking some liquidity. In this instance, the aggregator helps to finance/buy out the senior partner by taking some chips off the table and still leaves a minority or a majority of the business left for the next gen to own and control.
The Cons: For those advisors who want ongoing coaching, support and resources, these buyers may ring hollow. They do little to free up capacity, and the valuation may be slightly discounted because the buyer has fewer natural synergies to realize. Plus, the buyer provides little, if any, ongoing support. This can be an issue for Gen 2 once Gen 1 retires, should they desire such guardrails.
Option 4: Move once, monetize twice.
Even if a sale to a financial or strategic buyer might yield the highest after-tax purchase price for an advisor, not all advisors are attracted to the notion of moving their book to the RIA space. And for these advisors, the ability to “move once and monetize twice” can be a game changer. In this exercise, the advisor first transitions to a new firm and then enters into that firm’s sunset program.
The Pros: The combination of the recruiting deal, offered as an incentive to change firms, and the new firm’s retire-in-place deal is highly attractive. This move also gives Gen 2 a voice in the future because, presumably, they had some input into where the team chose to move the book. It also puts money in the pocket of the next gen because they would receive a portion from the recruiting deal.
The Cons: These deals always have real teeth to them, particularly for the next-gen inheritor. In this instance, the team is even more stuck because the advisor is tied down not just by the retire-in-place deal but also by the recruiting deal taken for moving the business.
Allie Brunwasser is a senior consultant and Jason Diamond is an executive vice president at Diamond Consultants, a search and consulting firm.
