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 Prices are rising for independent brokers because of demand from
investors and other firms, while supply is low because advisers have
made steady money through a five-year bull market and are waiting to
sell. At the same time the major brokerages -- Bank of America's
Merrill Lynch, Morgan Stanley, Wells Fargo and UBS -- are fighting
to keep their money-making assets from walking out the door.
For Jim Pratt-Heaney and Bill Lomas, two long-time brokers who left
Merrill Lynch in 2008 to found Connecticut registered investment
advisory group LLBH Private Wealth Management, the financial
benefits were key. Both told Reuters they had no doubt they would
get more money selling their shares of their independent business
than Merrill Lynch would have offered them.
"The idea that we didn't own equity in our business as an adviser
with a major wirehouse was concerning to us," said Lomas, 56.
Almost 100,000 brokers – or about one-third of the industry – are
expected to reach retirement age over the next ten years, according
to research firm Cerulli Associates, and the thoughts of many are
turning to how to pay for it.
Big firms usually compensate departing brokers for the book of
business they leave behind. Typically, brokerages pay between 0.85
and 1.4 times the annual revenue generated by the adviser, according
to Nate Lenz, director of acquisitions for Raymond James Financial
Services. The amount is usually paid out over three or four years,
as long as the broker's clients stay with the firm, and the money is
considered salary and subject to federal, state and local income
taxes.
At those rates, a broker bringing in $750,000 a year in fees and
commissions could receive $1.05 million at best over four years,
which if taxed at the highest federal rate of 39.6 percent would
leave the broker with $634,200.
By contrast, surging demand at a time when few wealth management
firms are for sale means that a business owner with a high portion
of fee-based revenue can now sell for an average of two to 2.25
times annual revenue, Lenz said. So a broker with a $750,000 annual
book could sell for at least $1.5 million, using the lower multiple.
For that seller, the proceeds - less his investment in the business
- would be subject to capital gains taxes, not income taxes. Capital
gains taxes top out at 20 percent, so the broker could walk away
with at least $1.2 million.
That extra money is attractive to the 55 percent of financial
advisers who have said they expect the majority of their retirement
savings to come from the sale of their businesses, according to a
recent survey conducted by asset manager CLS Investments.
For example, Gerald "Zeke" Strid, 72, along with his sons Erik and
Paul, left Wells Fargo Advisers to take the family's
Philadelphia-based business, Concentus Wealth Management,
independent about six months ago.
After 45 years, Gerald said feels he owns his business because it is
based on relationships he built with clients.
For now, he is going to hold on to equity and transition some
clients to his sons, but when he does step away, he expects to do
better financially than he would have retiring from Wells.
"You get a higher valuation at a lower tax level; that’s pretty
compelling to people who make their living as financial advisers,"
said Shirl Penney, chief executive officer of Dynasty Financial
Partners, a wealth management firm in New York. "It's a seller's
market right now.”
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Potential buyers include Raymond James Financial Services, which is
rolling out a program to help its independent advisers to find
others who are ready to sell and retire. In 2013, some 54
independent advisory firms were sold nationwide, up 20 percent from
the 43 deals that were done in 2012, according to a report by Schwab
Advisor Services.
Steven Dudash, a broker who left Merrill with a team of five in June
to launch IHT Wealth Management, said he plans to buy businesses of
retiring Chicago area advisers. In his first few weeks of business,
he has already fielded calls from interested brokers at all the four
biggest brokerages, among others.
BIG BROKERS
Merrill Lynch and Morgan Stanley recently added incentives for
retiring brokers.
Merrill changed its policies to let retiring brokers stay on as
senior consultants for a period of time they determine. That gives
them a salary based on their last 12 month's revenue while they
deliver a smooth hand-off of their clients to a successor.
In May, Morgan Stanley started giving brokers pre-retirement bonuses
of up to 50 percent of the adviser's trailing twelve months'
revenue, delivered before the adviser retires, and separate from the
account payout that brokers get, according to a source familiar with
the deals. The payout comes once the adviser joins a four-year
program and starts transitioning their clients on to another
adviser.
"We're forcing people to want to switch firms to try to monetize the
value of the book (advisers) created, and I don't think that's good
for the adviser, I don't think that's good for the clients," said
Joe Nadreau, head of innovation and strategy at Wells Fargo
Advisers. He said Wells was considering changes to its retirement
policies but was not certain of the details.
UBS did not respond to requests for comment.
Still, not every broker who goes independent is prepared to start
running a business after a lifetime of being an employee, said Mark
Tibergien, chief executive officer of BNY Mellon's brokerage
Pershing Advisor Solutions, and a long time expert on the financial
advice business.
"If you're not prepared to be a business owner, you are going to
spend your tax benefits making up for the clients you lost," he
said.
(Reporting By Elizabeth Dilts; editing by Linda Stern and John
Pickering)
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