For years, I have been called upon to put to rest questions about the value of changing firms. Some of the myths most commonly heard have been about the wirehouse and the independent channels. In 2004, when I wrote my first “Of Myths and Moving” column, total transition deals maxed at 120 percent of trailing 12-month production, and there were virtually no independent options for top advisors. Given the recent changes across the industry, it seemed a good time to revisit industry myths—both new and old.
MYTH 1: “Wirehouse deals will continue to rise just like they have every year since I’ve been in business.” Maybe they will, and maybe they won’t. The upfront portion of deals will not likely increase from the current maximum of 150 percent of an advisor’s trailing 12-month production, no matter how big the overall packages get. The upfront money is considered to be the “at risk” element of the deal by the offering firms and that number has not meaningfully increased since 2008. Instead, it is the back end hurdles and length of the notes attached to the deals that have increased. Also, with the current political climate in Washington and FINRA looking to mandate broker disclosure of transition packages, these packages may come down or at least be restructured in the near term.
MYTH 2: “Independence is only for advisors with plain vanilla businesses – not for those who serve high-net-worth or institutional clients.” All one has to do is look at the recent high profile moves to firms like Focus Financial Partners, Dynasty Financial Partners, and HighTower Advisors to debunk this myth. The advisors who moved to these models were top producers with a combination of high-net-worth and institutional clients. All needed to offer their clients access to the most sophisticated solutions with respect to investment management, credit and lending, trust and insurance capabilities, and research.
MYTH 3: “There is no way for me to have a viable succession plan outside of the wirehouse world.” All major firms offer some version of a “Retiring Advisor Program”—plug-and-play opportunities for an advisor to retire and leave his business to the next generation. The downside of these programs is that the multiple paid to the retiring advisor is much lower than he could get if he was independent and selling the business on the open market. The best succession opportunities today will be found outside of the big firms where advisors can multiply the number of potential suitors for the business, and set their own price and terms.
MYTH 4: “With all the talk and statistics surrounding advisors going independent, wirehouses will soon be dead.” While no one can dispute the fact that there is a sustainable migration from wirehouses to independent firms, wirehouses will continue to be a force within the industry. Brand recognition, strong infrastructure, and high transition packages are keeping most of these advisors in their seats. “While wirehouse asset market share may be on a decline, assets per advisor there remain the strongest in the industry,” according to a recent report from Cerulli Associates. “Advisors within wirehouses manage nearly double the assets of their competitors in the dually registered and RIA segment.”
MYTH 5: “If I decide to form my own RIA, I will be solely responsible for pulling together all of the necessary components to make it happen.” Those days are long gone. An entire cottage industry has been born to provide support and expertise to the breakaway broker, not only in the initial phase of launching a firm, but also the ongoing day-to-day activities that create organic and inorganic growth. Support is available in the form of outsourced investment management, operations management, legal and compliance, platform, performance reporting, and technology. Custodians, too, provide access to all the tools and resources an advisor would need, including practice management, operational support, and thought leadership.
With today’s expanded and highly complex landscape, the best way to ensure that you are making the right decision for you and your clients is by going through a thorough due diligence process where you ask all of the right questions of those in the know, rather than relying on hearsay. The stakes and the deals have never been higher.