Podcast Opening + Intro Hook
Corey: hey everyone Corey Whelan managing director of bridgemark strategies firm it’s helped over a thousand financial advisors objectively explore the broker dealer and Ria Marketplace and help them find the firm with the right combination of feel fit and financials for them in their business.
Corey: if you’ve been reading some of the trade Publications out there I’m sure you’ve been seeing coverage of large wire house teams making a move to Independence and I feel like a lot of people have an understanding on why they would do that more autonomy more control over their costs the ability to build true Enterprise Value in their business.
Corey: but what about the independent financial advisors that make a move from one firm to another and I figured I would cover some of the reasons why they didn’t want to make a move so before I go into the specific reasons I wanted to talk about the independent space as a whole.
The Independent Space and Profitability Pressures
Corey: the independent space is a low profit margin business when you’re paying a financial advisor 90 of the revenue that they produce you can see how those margins can be pretty low but they’re profitable abilities getting affected by a few different factors out there.
Corey: the first one is just a regulatory environment with things like DOL and reg bi it’s more expensive every single day for a financial advisor to have the right compliance Personnel in space and brace for that impact of getting a fine down the road that greatly impact profitability.
Corey: additionally due to increased regulation commissions on specific products have gone down significantly which impacts profitability and then also the fees that financial advisors are charging their clients has been going down as well so all of these things negatively impact profitability.
Corey: in 2020 82 broker dealers either went out of business or sold to another firm and in 2021 92 firms did the same so not only are there a lot of firms out there that don’t have enough operating Capital to stay in business but there’s also a lot of other firms out there that are maybe still in business that just don’t have the ability to spend tens or hundreds of millions of dollars on their platform per year to stay competitive.
Corey: and in short the people that are investing are are really winning the recruiting Wars and the people that aren’t are losing a lot of financial advisors.
Reason 1: Upfront Economics
Corey: so the first reason not in any order that a financial advisor would potentially want to make is upfront economics.
Corey: over the last five years upfront economics have greatly increased there’s an arms race constantly increasing their upfront deal to move and now there’s multiple firms out there that for the right practice they’re offering north of 70 of trailing 12 revenue for a financial advisor to make a move to their firm.
Reason 2: Ongoing Economics
Corey: the second one is ongoing economics.
Corey: there’s also an arms race to lower the cost for financial advisors to run your business so if you have the right type of business that an independent broker dealer is looking for the difference of you running the million dollar business at one firm versus another could be close to 250 000 in additional profitability for you and your business.
Reason 3: Technology
Corey: the third one is technology technology.
Corey: there’s no better way to in an inexpensive way add more scale and efficiencies to your business if you could accomplish doing something in 10 clicks that used to take a hundred and you multiply that by the amount of clients that’s going to be a lot of additional time back into your day.
Corey: the fact is there’s firms out there on an annual basis investing tens if not hundreds of millions of dollars a year on technology enhancements so the firms that are investing that much in technology are are winning a lot of financial advisors right now.
Reason 4: Mergers and Acquisitions Driving Moves
Corey: another reason we talked about earlier in the video but there’s a lot of firms being sold to larger organizations right now and when a firm is sold the financial advisor has the option to determine the Suitor that the owners of their firm chose for them or to go out into the marketplace and do their due diligence to figure out the firm that’s going to be the absolute best fit for them and their clients.
Corey: so we’ve been seeing a lot of financial advisors move because of mergers and Acquisitions and we expect a whole lot more over the next couple years.
Reason 5: Service and Home Office Capacity
Corey: the fifth one is service.
Corey: there are a lot of firms out there right now that are not investing in additional human capital inside of their home office as their firm grows or with the hiring crisis we’ve been in they’ve been losing a lot of staff and haven’t been replacing those home office staff.
Corey: so we’re speaking with a lot of financial advisors where in their firm for every 10 financial advisors that they have if there’s only one support person so imagine back in the day sharing one admin with 10 other financial advisors what a bad experience that would be.
Corey: the leading independent broker dealers are spending tens of millions of dollars a year that as they grow they’re continuing to keep that ratio much more in check of maybe five to one or three to one or even two to one to make sure there’s enough capacity in the home office to properly serve your business.
Reason 6: Succession Planning
Corey: the next one is succession planning.
Corey: one of the biggest benefits of being an independent financial advisor is the fact that you own your business and you one day you can sell it for True Market Value down the road but as we see a lot in the industry that’s easier said than done.
Corey: there are a lot of independent broker dealers out there that haven’t developed a proper way for financial advisors to sell their practice if there isn’t a financial advisor team inside of that broker dealer that’s willing to buy that practice themselves there’s very few independent firms out there that have actually shelled without the money to purchase that practice where a lot of the industry-leading independent broker dealers now are actually paying with their own money to make sure that a financial advisor can sleep at night and get the top value for the practice.
Reason 7: Taking Advantage of the Mergers and Acquisitions Environment
Corey: and the final reason we’re seeing a lot of financial advisors move to other firms is to take advantage of the mergers and Acquisitions environment.
Corey: I think a lot of independent financial advisors over the years have been told that they can sell their brokerage business for one times revenue and they could sell their fee-based revenue for two and a half to three times trailing 12 Revenue but just like there’s an arms race for upfront economics to incentivize financial advisors to move to a different firm right now with strategic acquirers there’s the opportunity for financial advisors to receive three four five maybe even six times they’re trailing 12 Revenue to potentially sell their practice depending on their size.
Corey: so the fact that financial advisors sell their practice for significantly higher than they thought is another reason we’re seeing a lot of financial advisors make a move right.
Wrap-up + Call to Action
Corey: I really hope that these help there’s a lot of other reasons why an independent advisor might want to make a move to another firm if you have any other questions on the ones that I mentioned or any in general please reach out to me via phone or my calendly link above and I look forward to having the conversation.
