Independent Firms Expanding Into W-2 Channel

Janeesa Hollingshead, Executive Editor, Wealth Solutions Report

With Integrated Partners Adding a W-2 Model, BridgeMark’s Nash Explains Increasing W-2 Trend in Shrinking Market

As WealthManagement.com points out, Integrated Partners has long paired CPAs with advisors as part of its CPA Alliance program. But one stumbling block over the years has been a lack of capacity: Advisors, by themselves, have been unable to serve the incoming business and still make time for their existing clients. 

One team – one dream!

For the program to work well, many advisors need to hire a junior advisor to provide added support, and that’s a move most of them cannot afford to make. This, in part, helps to explain why Integrated recently introduced a W-2 employee model. 

The firm will now employ junior advisors, who can gain confidence and build a book of business by teaming with seasoned professionals by helping to service smaller clients (typically in the $1 million and under range). That, in turn, allows senior advisors to grow and remain focused on their larger, more complex clients.

Jeff Nash, CEO and Co-Founder, BridgeMark Strategies

W-2 Model Waning but Perennial

Is Integrated’s move a harbinger of things to come? Not necessarily, says Jeff Nash, CEO and Co-Founder of third-party recruiting consultancy BridgeMark Strategies, noting that the primary trend points in the opposite direction.    

Stifel recently hired Alex David from Wells Fargo Financial Network Advisors to relaunch and build its independent solution,” he said. “That’s only one example. The industry trend is clearly towards independence or even towards RIA, so firms are trying to gain some recruiting momentum on a decreasing advisor base.” 

Still, he says investing the time, effort and resources to target a shrinking group of advisors still makes sense.

“While it’s declining, it’s not going away,” says Nash, referring to the W-2 model. “And I don’t think it will ever vanish completely. There are many advisors who want the support and infrastructure often provided by a W-2 firm.”  

Additionally, the W-2 model can be more profitable, Nash states.

Do your best, then outsource the rest.

Barriers and Risks

Notwithstanding the advantages of incorporating W-2 employment options, the buildout requires scale that will restrict it to larger industry players, according to Nash.

However, the downsides are limited for independent firms with the resources to enter this arena. While noting that there’s a business risk involved with starting anything new, he says the most prominent potential liability is related to real estate. 

Nash states that firms typically approach this risk with a structure that provides “office space, administrative support and benefits at a lower payout at approximately the actual cost, plus some markup for the work and the risk of putting the firm’s name on the lease.”

Significant Rewards Outweigh the Risks

You can only risk to win, or risk to learn.

For firms with means, the benefits often outweigh the risks. Increased recruiting options and the opportunity for higher profits lure firms to explore the W-2 option. 

“While signing a lease has some risk, taking on more risk typically comes with some additional return,” Nash says. “While a few additional percentage points of profit may not sound significant, if a firm’s profit margin is 10% and they can make 2% more profit, that’s a 20% increase in profitability, which is significant.”

Growing Trend, Shrinking Market

A rising trend into a decreasing market may appear counterintuitive or even unwise, but when factors line up for profitability, unusual things occur. 

Integrated added the W-2 model for specific scenarios involving CFA partners and their clients. Still, the emerging trend covers broader territory, and each entrant tailors the W-2 model to its specific needs, as Nash states: “Each firm that has started this has done it a little differently.”
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com

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