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Succession Planning Strategy: Wirehouse vs. RIA

Article featured in ThinkAdvisor and written by Shad Besikof on June 18, 2020

Succession Planning Strategy: Convert to an RIA First 

Last year, Goldman Sachs dropped a cool $750 million in cash for United Capital, the RIA founded by Joe Duran 15 years earlier. This deal represented further proof the M&A market has been heating up, to say the least. A recent report from RIA consultancy Advisor Growth Strategies showed a 29% year-over-year increase in the EBITDA multiple paid for advisory firms last year. More specifically, the multiple jumped from a median of 5.1x (in 2015-2018) to 6.6x last year.

The global coronavirus pandemic has slightly slowed the pace of dealmaking in recent months, per this Fidelity report, but experts remain optimistic about valuations and dealmaking, particularly since so many buyers have a good bit of cash on hand. The pandemic is also accelerating succession plans because it’s increased the amount of uncertainty in the market.

When ready to retire, wirehouse and broker-dealer affiliated advisors can increase the market value of their practices by transitioning to an RIA model first and selling that business instead.

Crafting an Exit Strategy

Financial advisors are typically around their mid-50s or early 60s and are eyeing retirement in the next three to five years. Since the amount of uncertainty in the market has skyrocketed in the wake of COVID-19, the risk of devaluation is real. A 20% correction in the market can drop the value of a business (based on EBITDA) by as much as 70%. Advisors who feel a sense of urgency about succession planning should run these numbers carefully rather than settling on an easy sunset deal. The wirehouse model of retirement often leaves money on the table.

Merrill Lynch just updated its Client Transition Program, which is now open to brokers who are at least 55 with five years or more of experience, while UBS has similar programs. In general, they tend to offer about 1.5 to 2 times your gross revenue, to be paid over a multi-year period. So, if you were doing $2 million in revenue, you’d receive $800,000 per year for, say, five years as taxable income. This is assuming there are no payout haircuts, which could shave that figure even more. The fine print varies.

Read full article at ThinkAdvisor.com 

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