Advisor Alternatives to Wirehouse Succession Programs

The old wirehouse sunset deals have all since been re-branded as succession programs but the decision for advisors remains constant: Should I sunset or sell?

The wirehouse succession programs:
Financial Advisor Succession Program (Wells Fargo Advisors)
Former Financial Advisor Program (Morgan Stanley)
Transitioning Financial Advisor Program (UBS)
Client Transition Program (Merrill Lynch)

What Do All Wirehouse Succession Programs Have In Common?

Financial consequences for retiring advisor

In addition to the legal consequences advisors subject themselves to with any of the wirehouse succession programs, the financial consequences are just as striking. When advisors exit through wirehouse succession programs they are:

• Getting half the value (if that) their practice is worth outside the wirehouse
• Getting paid typically over 3-5 years instead of getting 80% to 100% upfront
• Getting taxed at regular income rate instead of capital gains

When Financial Advisors financially advise themselves in the same way they would a client, this isn’t a sound retirement planning strategy from a financial perspective.

Receiving advisors aren’t buying, in reality, they’re renting

When an advisor “acquires” or “buys” a retiring practice it technically isn’t an acquisition at all. Wirehouses are very clear, and all the more transparent today, that they own the client relationships, not the advisor. Non-protocol wirehouses especially believe the clients are theirs and the advisors are simply interchangeable employees of the wirehouse.

In the wirehouse world, when an advisor receives clients from another advisor, it is, in reality, a rental program. The wirehouse attaches comprehensive non-solicit and non-compete agreements to these clients. These restrictions fall outside of protocol. If an advisor ever wanted to leave the wirehouse, the legal advice they are most likely to get from his or her lawyer is that the clients received from a succession program will have to be left behind.

What Alternatives Do Wirehouse Advisors Have?

1. Sell instead of sunset

2. Buy instead of rent

Sell Instead of Sunset

There are numerous opportunities for an advisor to monetize their practice at a fair value through selling. In fact, advisors have never had as much flexibility in a firm, timeline, and structures available as they do today.

• Wirehouse retiring advisors can stay at their firm for two to five years for a succession program. In selling a practice, the advisor can stay 12 months to years.
• The timeline and transition can be tailored to the retiring advisor’s situation, client base and goals.
• Advisors who want to sell but also stay on for a couple of years working with select clients, can maximize their practice monetization and fully retire on their own terms.
• Transitioning clients is a priority for the buyer and dedicate all the resources necessary to make the transition as smooth as possible.

Advisors are able to sell at full value which can ballpark at 2.5 to 3 times recurring revenue.

There is a lot of flexibility in structuring payments. Sellers can find deal structures that offer what is important to the selling advisor individually. If a seller is looking for a larger down payment, or a down payment with an earn out, or the ability to sell, stay on but slow down, and receive splits on new business development, these structures and many additional variations are available.

Get taxed at capital gains instead of regular income. Both the down payment and ongoing earn outs received can be taxed as capital gains when structured properly.

External financing for acquisitions is prevalent in the current independent space. Owners of independent practices are able to not only be competitive with larger firms in what they offer in dollars, they can also frontload most of those dollars as well.

The independent platform options are much more accommodating to the high net worth clients wirehouse advisors are focused on. SBL and investment banking options are available in the independent space and every year more becomes available.

Some of the Selling Options Include:

 Sell into independence. Buyers include independent practice principals and firms. There are individual principals, wealth management firms and larger ensemble options with Independent Broker-Dealer, RIA, and Hybrid RIA models, who are actively seeking to acquire and flexible in how they are willing to structure deals.

Breakaway to independence and sell later. Establish an independent practice with a custodian or IBD and sell in a few years when you are fully ready. With several top IBDs (independent broker-dealers) you can get a sizable transition package tailored to how many years you want to be there before you sell.

 Sell into a traditional firm. Buyers include regional competitors to wirehouses. Some regionals are just as eager to buy a practice from a wirehouse advisor as they are to recruit them. Transition over, stay for 6-12 months (or more), introduce clients to one or more advisors in the branch, get a large upfront payment and backend payments from 1 to 3 years.

Sell to Existing Team or Junior Advisor(s).

Independent
Retiring and receiving advisors at a wirehouse can move together to an independent model, have flexibility on how the retiring advisor eventually exits and put the buying advisors in a much more favorable position by “owning” the clients instead of renting them at a wirehouse. External financing is available for the junior or team member advisor(s) and there are independent platform providers and IBDs who can include recruiting transition deals to sweeten the pot for everyone.

Traditional
Retiring and receiving advisors at a wirehouse can move together to a traditional regional firm, have flexibility on how the retiring advisor eventually exits and put the buying advisors in a much more favorable position by “owning” the clients instead of renting. Regionals are protocol firms that will remain protocol firms. The “sale” can be tied into a lucrative recruiting deal that doesn’t require the retiring advisor to stay on long-term and doesn’t tie the clients into a non-solicitation provision that would fall outside of protocol.

Buy Instead of Rent

Many wirehouse advisors are interested in growing through client acquisitions. We recommend that these advisors consider what the end goal is and then prioritize the growth strategy accordingly.

With about a third of the industry’s advisors looking to retire within the decade the opportunity for inorganic growth has never been bigger. Growing through wirehouse succession programs, however, locks those clients into that wirehouse with restrictive non-solicitations that fall outside of protocol. The “purchased” clients are treated differently legally than those who an advisor directly brought in as clients.

What is the point in trying to grow through receiving clients through succession programs if you aren’t building a practice that you can then monetize one day? Acquiring clients should be a long-term strategy that will provide long-term benefits and a big payoff in the end.

Moving to the independent platform is the best way to grow through client acquisitions. Financing is readily available for acquisition loans and firms are eager to help introduce their retiring advisors to their growth-minded advisors in order to retain those clients at the firm. This allows the advisor to own the client relationships instead of renting them which builds and compounds the value of the advisor’s practice.

Have a Confidential Consultation with Advisorbox

If you are a wirehouse advisor considering retiring or acquiring we invite you to give us a call to discuss other options that are available. We work for the advisor not any firm or option you would consider. We can help inform and compare traditional and independent options and discuss strategies that would best match your individual situation, timeline, and goals. We turnkey the entirety of the process and maximize the deals offered to the advisors we work with.