How to think about transition deals when evaluating a firm or model: 5 key considerations.
Why do advisors switch firms? Most industry experts could rattle off a laundry list of reasons: more freedom and control, the ability to serve clients better, access to a greater array of products and services, better work-life situation for the advisor and team…the list goes on.
And, of course, there’s the dollars and cents.
While no move should ever be governed by one’s personal financial gain at the expense of clients or the business, there is no question that a recruiting transition deal is an important consideration in any potential move, as it should be.
A transition involves risk, and, at the very least, it can disrupt momentum and the day-to-day business operations.
So, how should an advisor think about transition dollars when evaluating a potential firm or model? Clearly, it’s not as simple as “pick the highest offer” because we see firms win recruits all the time with “sub-market” deals.
To that end, here are five things to think about when considering a move with respect to transition deals:
- Are you comfortable being long-term greedy at the expense of upfront economics?
Typically, when advisors evaluate transition deals, they logically place greater weight on the upfront package received for joining a firm. A transition deal may have some back-end components, but it’s largely viewed as a front-end monetization event. But it’s far from the only way an advisor can monetize: Consider the myriad of advisors opting to move to an independent firm or model. In most cases, they are consciously choosing to forgo a lucrative transition deal for long-term opportunity: the ability to sell the business at day’s end for a lofty multiple. That’s long-term greedy. How does an advisor know if they are “long-term greedy?” The answer comes from asking some tough questions: Would you make a move if it meant zero dollars upfront? Do you need the certainty of some upfront transition money? Would you prefer autonomy in the long run to dollars in the short run?
- Do you want to build an enterprise?
Similarly, when an advisor accepts a recruiting deal from a traditional firm, it comes with some strings attached. While many advisors think of themselves as “intrapreneurs” (i.e., they are running their own business within the confines of a broader enterprise), the reality is that the firm itself owns the client book and, therefore, an advisor’s options to monetize at day’s end may be fairly limited. By forgoing a transition deal and opting to build an enterprise, an advisor maintains control over their equity, business, and clients. At heart, most advisors know if they have the entrepreneurial spirit and desire to build an enterprise. After all, it’s not for everybody.
- How much do you value equity vs. upfront cash?
Not all recruiting deals are structured the same way, even if upfront terms are relatively similar. Many firms, particularly boutique firms, and recently established RIAs, offer some equity in addition to cash. While some advisors undoubtedly prefer the certainty of cash, equity can provide the opportunity to achieve major upside, ensuring the maximum alignment of incentives between firm and advisor. Often, recruiting deals that are structured with an equity component only make sense if the advisor truly believes in the long-term vision and success of the firm. But I would argue that if you believe in a firm enough to move your clients there, you ought to believe in it enough to value the equity.
- What are you willing to give up?
The adage “there is no such thing as a free lunch” is true in advisor recruiting. Advisors who take large transition deals from traditional firms are typically giving up control, freedom, autonomy, and, equally important, ongoing economics. For example, an independent broker dealer (IBD) may offer a small fraction of what a traditional wirehouse offers in transition dollars. However, the ongoing payout is likely much higher at the IBD.
- It’s ok if the tie goes to the proverbial runner.
A decision to move should never be solely about the money—but, likewise, that doesn’t mean that it shouldn’t be a consideration. After all, a transition involves risk, disruption to the business, and a great deal of work. And if two or more firms check the right boxes, it’s perfectly fair to use a transition deal as a tiebreaker. However, that’s when it becomes even more critical to ensure that the firm selected does indeed satisfy the client and business needs above the financial remuneration.
Some in the wealth management industry view transition deals with cynicism and skepticism. That is, if an advisor accepts a recruiting deal from a firm, the move is solely because of the money. However, while it’s true that a recruiting deal should not be the primary driver of a move, it is an important component, nonetheless. That’s not to say that advisors should select the firm that offers the “highest” transition deal. The reality is that “highest” in this context is difficult to define: It means different things to different people, and depending on what you value most, it may impact how you think about a potential move.
As seen on WealthManagement.com…