On paper, enhanced succession plans like Merrill’s recently announced CTP, are a no brainer for both retiring and inheriting advisors alike. Yet, the reality is more nuanced.
Merrill is not alone in offering a retire-in-place program such as CTP. All four wirehouses have similar programs (also referred to as sunset deals or internal succession deals), each designed to both reward advisors for their life’s work and bind them, their clients and inheriting next gens to the firm.
As a result, wirehouse advisors, as they contemplate the end of their careers and regardless of whether they have previously monetized their book or not, are increasingly faced with a conundrum: Should they accept their firm’s retire-in-place deal or transition their book elsewhere?
Notably, there are pros and cons to these deals for both retiring and next-gen inheriting advisors. On the one hand, retire-in-place programs allow senior advisors to “hit the easy button” and monetize the book without the hassle or risk of a transition. On the other hand, these deals are often consummated at well less than “fair market value,” and, more importantly, they come with real teeth and stringent restrictions, particularly for the next-gen inheritor of the book.
So how should advisors think about these deals, which are now offered earlier and more aggressively than ever before?
The Good
- Money, Money, Money: Let’s not confuse the plot: firm sunset deals offer retiring advisors the ability to put real money in their pockets in exchange for simply staying put. In many cases, these deals can reach 200-300% of an advisor’s trailing 12 months revenue.
- Certainty and Stability: Beyond the dollars and cents, these deals also offer peace of mind to advisors and clients alike. They don’t need to move assets, and it’s effectively riskless since there is no major transition involved.
- Rapid Growth: For the next-gen advisor, being the recipient of a sunset deal is an incredible way to turbocharge growth. It is the wirehouse equivalent of adding inorganic growth via M&A. In fact, many advisors in growth mode will make this a repeatable part of their growth strategy (i.e., become the sunset program recipient for as many advisors as possible).
The Bad
- The Motives May not be Pure: These deals sound like a no-brainer on paper. Why wouldn’t an advisor take a massive check for little to no risk? However, the fine print reveals a more complicated story: Merrill (and their wirehouse peers) use these strategies as their primary retention tool. These programs are often billed as a retention strategy- one that effectively binds the advisors and clients to the firm for the life of the agreement (5-7 years, typically).
- Money, Money, Money, Part II: While it’s true that firm sunset programs offer advisors the ability to monetize their book for significant sums, these deals are, in reality, far below “fair market value.” An advisor could easily earn more for their book at day’s end if they have the appetite to go through a transition—either via a recruiting deal from another traditional firm or by creating a competitive bidding process and selling their book with capital gains treatment on the open market.
- Paying for Nothing: There is no such thing as a free lunch. Next-gen inheriting advisors who are the recipients of these programs end up paying for a piece of business out of their own pockets via a reduction in ongoing payout on the inherited book. That’s perfectly fine until these next-gen folks realize the harsh reality: At the end of the sunset deal, they don’t truly own anything—as the assets belong to the firm.
The Ugly
- Limited Optionality: We often say that no advisor is ever stuck. However, the one exception might be recipients of sunset deals (i.e., next gen inheritors). Because these deals come along with onerous restrictions and lockups, they severely limit optionality for the next 5-7 years. (We have seen some cases where advisors bound by sunset deals opt to break contracts and leave their firms before their obligations are fully forgiven, but it is expensive and riskier to do so.). It may be perfectly reasonable for a team to commit to the status quo for the near term but it is critical that both the retiring and inheriting advisors are certain that they can live with whatever changes the firm enacts for the life of the agreement.
- No Panacea: Wirehouse advisors often have frustrations and pain points that seemingly get worse each year. Pressures to cross-sell products, overly stringent compliance regimes, restrictions on hiring additional support staff, …the list goes on. And while firm sunset deals certainly serve to monetize the book in a meaningful way, they do not solve for anything else. In fact, they may make life harder for the inheriting advisor because the firm knows they are essentially stuck.
As our analysis illustrates, the answer to the sunset deal conundrum is not straightforward. Should you take the deal? It really depends on what you value most (the ease of staying put versus maximizing enterprise value), how aligned you are with your firm's future direction, how much you care about your next-gen and your clients, and myriad other factors.
Jason Diamond is Vice President, Senior Consultant of Diamond Consultants—a nationally-recognized recruiting and consulting firm based in Morristown, N.J. that focuses on serving financial advisors, independent business owners and financial services firms.
