Several large registered investment advisor acquirers offer some form of an equity swap, such as Focus Financial Partners and Carson Group, in which an RIA sells a stake in their firm in exchange for a stake in the larger acquiring entity. But the firms they are looking for usually have a high level of assets or production. Independent Advisor Alliance, a super office of supervisory jurisdiction of LPL Financial, hopes to bring this kind of program downstream to smaller shops.
Charlotte, N.C.-based IAA, which has over 200 advisors and $5.4 billion in assets under management, plans to roll out an equity swap program where advisors would join IAA as W2 employees. IAA will pay an advisor up-front money to enter the program, and the advisor will get equity in a separate entity that acts almost like a subsidiary of IAA. That equity stake would depend on how many advisors are in the program and would be based on the advisor’s annual production.
“This is being done for the big firms; it’s just not gotten down to the more industry standard, industry average,” said Robert Russo, CEO and founder of IAA. “We just think there’s a way to do it at a different minimum.”
Earlier this year, Private Advisor Group, another large OSJ of LPL, introduced a new affiliation model aimed at luring financial advisors out of the wirehouses, albeit not through an equity swap.
Russo said his program is not “channel-specific”; rather, “We’re looking for advisors that are looking to increase the value of their book,” and standardize their operations and investments.
If an individual advisor were to sell his or her practice outright, they may get something like a two times multiple of earnings; in the equity swap, the value they'll receive should be higher, he said. This is a good fit for an advisor who is starting to plan for their retirement from the business, wants a succession plan and wants to outsource a lot of their day-to-day operations. When the person retires, the other advisors in the program will take over that book of business.
Up to now, all of IAA’s advisors have been independent contractors. They get 100% payout, but IAA charges a flat fee of $32,000 a year for its services. W2 advisors will have a lower payout; the pricing hasn’t been set yet, but it’ll be higher than the industry standard at the wirehouses, which Russo says is 32%-38%. These advisors won’t pay the flat fee.
The OSJ will provide all the infrastructure involved in running a practice, including office space, technology stack, investment management, financial planning, CRM, website and administrative work.
“It’s a way for them to really double their payoff at the end, and hopefully maintain or increase their ongoing actual income,” Russo said.
The equity swap program is part of IAA's larger move into mergers and acquisitions; IAA hired Kyle Campbell, previously a loan officer at Live Oak Bank, to lead a new M&A program.
The new division will also include a buy-and-sell "prep" program, which will guide advisors on things they can do prior to selling to maximize their book’s value, or how to become a valid buyer in the marketplace, which Russo says is a different professional discipline than someone who simply wants to grow. The firm is currently looking for a third-party valuations provider so every IAA advisor will receive valuations of their practices every year, and is launching a matchmaking program to connect advisors within IAA to others who are looking to buy or sell.
“Advisors work their whole lives to build this great piece of equity, and then all of a sudden they retire. We think there’s a way they can get more value by prepping their book to sell over a period of time.”
Campbell will also be tasked with helping IAA itself acquire—whether that’s other OSJs that haven’t achieved size and scale, or firms where current advisors can act as the servicing agent for a retiring principal.
