How An RIA Owner Can Maximize Value: Guidance from Perigon Wealth Management, The AmeriFlex Group, Stifel Independent Advisors
How many times have we seen headlines and white papers all focused on the idea that large volumes of independent financial advisors are aging out of the profession – And many of them don’t even have a succession plan in place (gasp)?
There’s now a thriving segment of the wealth management industry comprised of consultants, recruiters, lenders and other professionals who are on task to help create and execute on succession plans for independent FAs who are behind the proverbial eight ball in thinking through a planned exit from their profession.
But give this much to Gen X advisors, who have watched too many of their Boomer industry counterparts pull the career ripcord without knowing whether a parachute is actually there: They get it.
I’m In My Final 15 Years Of Work!!!
Gen X financial advisor-business owners who have reached their late 40s and early 50s are acutely aware that they are looking at the final 10 to 15 years of their productive working lives.
And the anecdotal evidence would suggest they are being far more circumspect when it comes to actively exploring how they can maximize the value of their final stretch of working years – And to do so on multiple levels.
Our WSR reader-submitted question comes from a Gen X independent financial advisor who is wrestling with this very issue. Before we share his query, let’s meet our panel of experts who are offering their guidance in this issue:
- Dan Newhall, Chief Commercial Officer and Managing Partner at Perigon Wealth Management. Headquartered in the San Francisco Bay Area, Perigon is an independent RIA with coast-to-coast offices, as well as a presence in Hawaii, and over $3 billion in client assets. The firm, which is backed by Merchant Investment Management, acquires both minority and majority stakes in independent wealth management businesses.
- Thomas Goodson, President & CEO of The AmeriFlex Group, a Las Vegas-based hybrid RIA group that supports independent financial advisors across the country. The firm, which has been growing rapidly via recruiting, has approximately $4.75 billion in client assets.
- Tim Boostrom, Managing Director of Business Development for Stifel Independent Advisors, the recently rebranded independent broker-dealer subsidiary of Stifel Financial Corp., the global investment bank and wealth manager. Stifel Independent Advisors has over $4 billion in client assets, with financial advisors and branches throughout the country.
This Month’s Reader-Submitted Dilemma
I’m the founder and sole owner of an SEC-registered hybrid RIA that does asset management (mainly working with packaged products, primarily ETFs), financial planning and retirement planning for mass affluent individuals and families. We have a “friendly broker-dealer” relationship that enables my business to work seamlessly with brokerage accounts and insurance products.
I have two employees: A junior financial advisor who is very high-energy and off to a great start after joining my business a year ago. I also have a very experienced administrative assistant, who has been with me since I launched my business seven years ago.
Here are the other key metrics for my business, which I would describe as having extremely stable revenues but with slow growth over the past two years in particular:
- $94 million in client assets in total
- Annual topline revenues around $820,000
- EBOC (earnings before owner’s comp) is roughly $675,000
- I spend $160,000 a year total in employee compensation for my two employees
- We’ve been using a shared office space subscription service since before the pandemic, so our office costs have been negligible for years now.
Now, here’s some additional background about myself:
- I am currently 47 years old, and I plan on retiring when I’m in my early 60s.
- For as much as I hate using the term, my firm is more of a “lifestyle business.”
- I have great chemistry with my clients, and most of them won’t be reaching the distribution phase of their financial lives for many years.
- Having launched my own business after serving for years in the bank channel, nothing in the world could ever persuade me to be a W2 employee again.
I’d add that I’m done with owning and operating my own RIA. If I were a much larger firm, the compliance complexities would be worth it, but it’s not working for me.
I feel like the next move I make should include some financial recognition of the business I’ve built and the fact that I’m probably entering my most productive, final 10-15 years of work.
Here’s my dilemma: I’ve been approached by an RIA aggregator who wants to acquire a minority stake with up-front cash, and an offer to buy the entirety of the business when I retire.
I’ve also been approached by the friendly broker-dealer I do business with to drop my RIA registration and become an IAR on their platform, with a generous up-front transition check.
Finally, I’ve been approached by a hybrid RIA and Super-OSJ group affiliated with one of the top fifteen largest independent dual registrant firms in the country with a similar offer.
What’s the best way for me to think about these potential alternatives, and are there additional options I should be considering – And why?
Dan Newhall, Chief Commercial Officer and Managing Partner – Perigon Wealth Management
Congratulations on building a solid business! While it probably makes sense for you to step away from the costs and complexities of running your own RIA, becoming a dual registrant advisor business on an IBD and corporate RIA platform can frequently be a tough adjustment.
The reality is that IBDs – even IBDs that have run their own corporate RIA platforms for quite some time – tend to be slower to change and adaptation, and comparatively heavy-handed with regulatory, compliance and operational practices.
Given the premium you appear to have set on autonomy and flexibility in your work life, you might find that no amount of up-front recruiting dollars is worth such a move, even if you already have some prior familiarity with the IBD firm.
Based on the context you’ve provided, it’s pretty clear that maintaining control and ownership of both your client relationships and your broader business are of paramount importance. And you’re also showing foresight by recognizing that your next move should capture the likelihood that you are entering the final, most productive 10-15 years of your career.
Capturing the most value with whatever next step you take while maximizing control and ownership are all goals that need to be carefully balanced.
With these considerations in mind, either a minority or change-of-control sale would be the two options that would most effectively help you reach all of your goals.
Let’s tackle the minority stake sale first, as it might be the more appealing of the two options for you: Under this scenario, you would sell a minority equity stake in your firm to a larger, more established enterprise that can act as a strategic and operational partner. This structure also lends itself to future ‘tag along’ rights being granted to sellable cash flow from your business in the event the acquirer eventually sells for a larger multiple than your business could achieve on its own.
Using this approach, you can retain the ownership and autonomy you desire, but offload the administrative or operational complexities that you don’t want consuming your time. This approach also enables you to participate in the majority of the growth you generate through cash flow to the business, while putting in place the potential for an even larger multiple for that cash flow in the future.
The second approach would be a full sale of the business where the financial consideration is equity heavy. In this case, linking up with the right partner firm is obviously mission critical.
But if executed correctly, you would receive a chunk of equity in the larger, faster growing firm, as well as some upfront cash in the near term. This situation may provide more synergies than a minority stake in that it aligns the seller and buyer equity and allows for a smoother, more cross functional integration of the firms – both parties end up in the same, big boat.
But whether we’re talking about a minority or majority stake sale, with the right partner and deal structure specifics, you would be able to retain your autonomy and lifestyle practice while ditching the day to day of operating and administrative headaches of running your business.
Thomas Goodson, President & CEO – The AmeriFlex Group
First off, great job creating and growing a successful firm. It’s not easy wearing all the hats that are needed to run an independent RIA, while also devoting time to serving the needs of your clients.
Even though you’re still a ways off from retirement, you’re right to start thinking about the next step in the life cycle of your business and drilling down on what you really want out of it.
It’s not often that advisors have the self-awareness to realize that the rat race they’ve been on for years isn’t for them, and it’s completely natural and understandable that after so many years of hard work, you want to “take some money off the table.” You’re already off to a great start, and I’d would encourage you to stay on that journey.
In the meantime, you’ve got a few offers on the table. Congratulations! You should take each one seriously, and undertake due diligence to truly understand how each option fits with what you want for yourself and your business. The reality is that each option has positive points as well as tradeoffs.
Perhaps most importantly, the alternatives you referenced are actually not the only options out there for your business.
Firms are getting more creative when it comes to partnering with successful firms such as your own, and it’s worth looking at what novel models are out there.
For example, at The AmeriFlex Group, we offer a partner-advisor model in which advisors who affiliate with us are given the opportunity to become part-owners in our firm.
In your case, you could tuck in with our platform, which would take some of the burden off of your shoulders in terms of the administrative and compliance responsibilities you’re facing while still building up the value of your business.
Meanwhile, as a partner advisor, you would be accumulating equity in our broader firm and building value in that way. Additionally, we also offer approaches to structuring succession plans for practices that can compensate you for years before you actually retire.
Of course, we’re biased towards our approach, but the reality is that there is an industry full of people thinking of innovative ways to structure your transition. You owe it to yourself to explore what is out there and find the model that works best for you.
Tim Boostrom, Managing Director of Business Development – Stifel Independent Advisors
Congratulations! You have built a great business with a lot of potential. Now you’re at a crossroads where many advisors find themselves: Comfortable financially, successful business, but tired of certain aspects and wondering what to do next.
This is what your self-described “lifestyle” business is … one that lacks a challenge or motivation. You were willing to put up with the compliance work in the past because you were growing your business. Now that the growth has slowed, there is no challenge that is making the compliance efforts worthwhile.
You have two options: Hang it up and sell part of your revenue/business to a third party OR go into growth mode again.
- The case for selling – relatively easy, potentially lucrative, and you can continue your “lifestyle” approach to your business.
- The case for growing – you are positioned perfectly with a scalable investment strategy and experienced staff who have capacity right now for growth. Secondly…Because growing is way more fun than selling.
My advice is to explore the option of buying a book of business and/or recruiting an older advisor who is nearing retirement. One way to do that is join an independent broker-dealer who will partner with you to create and execute a custom acquisition strategy.
Use the transition dollars that they will provide you as seed money for the acquisition(s). You are essentially hiring a business partner to handle the things you don’t enjoy (compliance) and to help you with recruiting and acquisition, all while retaining full ownership of your business.
Do what you love, and outsource the rest. By spending most of your time on the challenges and goals that you enjoy, it will revitalize you to have fun and continue to build your business for the remaining 10-15 years of your career.
Next Month’s Ask the Experts Panel
Many thanks to Dan Newhall of Perigon Wealth Management, Thomas Goodson of The AmeriFlex Group and Tim Boostrom of Stifel Independent Advisors for their analysis and guidance!
As always, each WSR issue is built on feedback and suggestions from the members of our community – Especially when it comes to our monthly Ask the Experts feature.
If you have a dilemma or issue that you’d like us to bring together some of the best minds in the wealth management industry to address, please let us know. All reader queries will be kept strictly confidential.
Michael Madden, Contributing Editor & Research Analyst, can be reached at firstname.lastname@example.org