5 criteria for advisors to consider when weighing the risk vs. the reward in a move.
It’s common knowledge that even the most successful moves are disruptive to the advisor, the business, and clients. Why, then, are so many teams willing to make a change, even when the status quo is more than good enough? Clearly, these teams decide that the short-term risk and disruption will ultimately be worth it in the long run. But that’s difficult to know in advance.
So, how should an advisor think about risk versus reward when considering a move?
Most advisors begin the exercise of evaluating a move through two important metrics: expected asset portability and total potential recruiting deal (transition package). But it’s critical to also consider the expected impact of a move on clients, the team, and future growth potential. Only via this holistic view can a team truly begin to determine if the pain is worth the gain.
- Money: A transition deal helps mitigate risk, enabling an advisor to take chips off the table in the short term.
Upfront transition capital helps offset the risk of the transition, the disruption to cash flow, and the deferred compensation an advisor walks away from. And the good news is that transition capital hit a high watermark in 2024, with top deals in the wirehouse world reaching 400% of T12 for select teams. Top deals from regional firms typically range from 225-300%, with a couple of notable outliers that approach wirehouse levels. Even in the independent landscape, where transition deals used to be modest, we are seeing deals reach 100% or more for the best teams. So, for advisors that view a deal as risk mitigation, there are many options. Ultimately, advisors will need to assess how much upfront capital they need in the short term versus the enhanced long-term economics and enterprise value creation that comes with independence.
- Portability: Will clients follow?
Assessing the strength of client relationships and examining product transferability are the two key elements to determining portability. The first step is to divide clients into three buckets: those who will move, those who may move, and those who are unlikely to do so. When categorizing clients, consider the scope, length, and genesis of the client relationship. Once clients have been categorized, assess the percentage of revenue and AUM represented by each group. Also, decide if you want to leave certain clients behind—it’s a great chance to pare down the book to focus on high-value relationships and to make room for new business (a process we call “shrink to grow”). Step two of the process is to do an initial review of the investment book to identify products that might be sticky to the firm, such as alternatives through feeder funds. These two steps will provide a good sense of overall portability.
- Clients: Understanding the benefits of the move for clients is key to offsetting their concerns.
A successful move is grounded first and foremost in finding a better home for clients. So, it’s important to ask the right questions to determine what’s in it for them:
- Will the new firm provide more support staff, and will this facilitate an even higher level of service?
- Is there an opportunity to do more, adding things like family office services or tax? And does the investment platform provide greater access to differentiated solutions like structured products, boutique alternatives, and private deals?
- Is the environment less bureaucratic, and can advisors and staff get things done for clients more efficiently?
- Does enhanced technology create a better client experience and more customized reporting?
Understanding how a transition benefits clients and how best to articulate these benefits enhances portability and helps mitigate the risk of a move.
- Team: A move is hard work for advisors and support staff alike, so it’s important that the entire team see the value to them.
Quality team members make a wealth management business operate like a well-oiled machine, ensuring that service is impeccable, and clients are happy. However, compliance mandates and bureaucracy, plus increasing revenue hurdles to receive a fully paid support person, are resulting in understaffed, overworked teams. Understanding the team’s pain points and considering what might make their work lives better post-move is key to getting staff on board as enthusiastic contributors rather than reluctant participants to a move. Benefits can range from more efficient operational procedures and better technology to bigger-picture items like restructuring a team to add additional staff, redefining roles and responsibilities, or even shifting certain staff into an advisor training program. Spending the time to understand where the team is coming from and to address their issues is the way to mitigate the risk of losing key team members.
- Growth: Moving can be a major catalyst for growth.
Advisors operating in an environment that is bureaucratic and managed to the lowest common denominator often find that growth is negatively impacted. For some, it’s the lack of access to high-end resources that slows them down, and for others, it’s an inability to freely market to differentiate and develop new prospects. Often, advisors don’t even realize how limited they are until they see the possibilities that exist outside their firm. So, an important part of the risk versus reward calculation involves assessing the growth potential at the current firm against what could be possible following a move. Consider whether a move will yield new services for clients, the opportunity to capture greater wallet share, or even to receive referrals from the new firm. Although the status quo may seem to be the safer option, there is real risk in restricting the business to fit the confines of a firm that is no longer a good fit. Such actions may limit growth and can result in advisors missing the opportunity to achieve maximum career enterprise value.
The decision to switch firms is a difficult one and always involves some degree of risk. So before staying or going, consider these five variables and if all signs point toward a move, then take the leap!
