Going Independent Means Better Exits For Retiring Advisors

Wednesday, April 13, 2011 19:26
Going Independent Means Better Exits For Retiring Advisors

Tags: M&A

San Francisco RIA sold his $30 million book to a larger competitor. What wirehouse would have bought clients it already owned?

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The story of San Francisco registered investment advisor Sylvan H. Kline Jr. recently crystallized a few of my thoughts on long-term career planning for advisors.


Kline made a fair number of local and even national headlines this week on news that he’d sold his $30 million book to a bigger RIA, Nelson Roberts Investment Advisors, and was now free to retire.


We help a lot of our clients sell their businesses when it’s time to exit the industry. It’s almost certain that Kline got a better deal as an independent operator than he ever would have gotten in the wirehouse.


For one thing, dollar for dollar, the independent model generates higher annual return on client assets.


It’s simple math. Figure $30 million in AUM might generate an average fee of 85 basis points, or $255,000. Depending on the trading environment, that same money in the wirehouse could generate maybe 50 basis points in commissions, or $150,000.


Whether you’re a producer or an institution looking for the best ROA you can get, the independent book simply throws off more cash.


And because the RIA in our scenario owns his client relationships and his business processes, a would-be buyer will pay more for an orderly transition.


I find that independent advisors -- RIAs and independent brokers alike -- can generally sell their AUM for around 220% of whatever income those assets annually produce. In the wirehouse, you might be able to sell at 150% of your payout, which is generally around 43% of production.


So everything else being equal, the $30 million RIA could look forward to a final check of $561,000 when it’s time to sell. The $30 million wirehouse broker might get 18% to 20% of that money.


And that assumes that the wirehouse will let its reps take enough ownership of those accounts to sell them to the buyer of their choosing!


While everyone has to start their career somewhere, I think we’d all rather end it in the place that lets us build the biggest nest egg we can. After all, it’s not just your clients who have to plan for retirement.

Comments (1)

Chris Winn
Great points.

Another consideration is also the comparison of the fee structures. It is often the norm that a wirehouse or IBD advisor has its fee-based clients in contracts where the transaction costs are absorbed by the advisor (and not the client). The vast majority of RIAs pass along the transaction costs (which are often lower as well) to the client.

This more transparent model also has a significant effect on the profitability of the Adviser as the business scales. RIAs generally find that they can charge a higher AUM fee and still bring down costs for the clients. Further, from a compliance and risk standpoint, there is also better alignment of interests. There is not an incentive for the RIA to hold back on the frequency of portfolio rebalancing.

Thanks Ryan.
Chris Winn , April 15, 2011

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