5 challenges facing successful independents


An interesting trend is developing among the largest and most successful independent broker-dealer practices. They are essentially “growing themselves out of the market.” That is, their practices have gotten to a point at which there is not a viable successor within their broker-dealer network.

It’s a high-class problem to have — one that we see at every IBD when the top 5% to 10% of individual practices (typically those generating in excess of $3 million to $5 million of gross dealer concessions) reach a point where they begin thinking about their endgame and how they will monetize their life’s work.

Typically, advisers running independent practices would opt to sell within their own broker-dealer as it’s the path of least resistance: Buyer and seller operate on the same platforms and systems, typically have compatible businesses and are familiar with each other on a personal level. Also important, an internal transaction eliminates the need to change broker dealers, which triggers a time-consuming re-papering event that is sometimes risky — especially at a point when a business owner is trying to simplify his life.

But there’s a catch: An intra-broker-dealer transaction isn’t always possible.

One might think that the largest and most highly regarded businesses should have their pick of buyers, yet that’s not always the case. We often find five key factors limiting a business owner’s internal options:

  1. Sophistication and scale. In most M&A deals, sellers prefer aligning with a larger entity because they typically have refined processes, institutionalized businesses, a bench of next-generation talent and a demonstrated aptitude in operating successful businesses. Since the top producers are in rarefied air within their broker-dealers, there are very few (if any) practices that meet this requirement.
  2. Capital. Even with COVID-19 altering the valuation landscape, top firms still expect premium multiples and the majority of a purchase price paid at time of closing. As a result, intra-B-D buyers will often lack the capital and risk appetite to finance a transaction (even in cases where debt financing is available). This means internal buyers require a “seller-financed transaction,” in which retiring advisers, in essence, pay themselves out of their own cash flows or accept a lower overall valuation.
  3. Bandwidth. Many compatible buyers are at capacity already, so they do not have the ability to take on additional relationships.
  4. Limited supply: Regardless of the quality of an IBD, there naturally exists a finite population of affiliated practices — especially ones that operate compatible businesses and are located within a specific geography.
  5. Incompatible runways: Even if there is an ideal match, the top firms within a broker-dealer are often in a similar place in their business life cycle and may be looking for a succession plan themselves in the near term.

So when it comes to identifying a succession plan, what are the options for these larger independent firms? There are six paths to consider:

  1. Sell within their B-D. As described above, this may lead to a less-than-ideal succession plan or deal structure, but if the conditions are right and there is an appropriate fit within the IBD, then it makes for a more comfortable and seamless transaction than may be found with external options.
  2. Sell within their firm. An internal sale could mean promoting from within or using the carrot of succession to recruit from the outside. Though this raises a question around liquidity: How does the buyer access the capital needed to fund the transaction? Plus, finding the perfect fit is often difficult as most firms do not have suitable next-generation team members in place, and external recruitment is far from a guaranteed result.
  3. Sell to a practice at a competing B-D. This path opens up the field to additional succession partners and may enable the seller to “move once and monetize twice” — a process by which the sellers can get an upfront recruitment deal and monetize their practice. However, this strategy requires the investment of the effort to transition and re-paper, and if it’s not executed properly, could put the eventual monetization event in jeopardy.
  4. Sell to an RIA. By opening the field to RIA acquirers, larger practices can exponentially increase the universe of potential buyers, leading to more attractive valuations and deal structures, and a higher probability of finding the best possible succession plan. The downside is the need to transition, re-paper and take on transition risk.
  5. Sell a portion of the business to a financial buyer. Private equity sponsors, family offices and even broker-dealers have demonstrated interest in buying into quality wealth management firms. This type of buyer may take a minority, passive stake in the company or offer up more of a strategic angle by helping the firm to acquire, recruit or expand its service offerings to clients. Such buyers also solve for valuation and capital challenges, and typically will enable a retiring adviser to retain his brand, business model and organizational DNA. However, these organizations typically do not have a bench of next-generation successors ready to take over, so factoring in extra lead time prior to retirement may be necessary.
  6. Do nothing. The wealth management industry is one where many business owners choose to continue working well past the typical retirement age. Sticking with the status quo is what some prefer as it enables them to retain their equity and annual income into the future and does not require the hard work of transitioning a business to the next generation. Of course, leaving clients without a continuity plan is fraught with its own moral hazards and is often the option of last resort should all other possibilities fail.

Any succession plan requires a thorough self-assessment, due diligence and a good deal of flexibility. Yet larger IBD practices are often asked to give up even more than their smaller counterparts when selling to another IBD within their network and risk compromising what is best for their clients and their own retirement. The beauty of owning a business is that the principal can choose how he wishes to solve for succession, as well as what is most important to accomplish in that transaction.

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Louis Diamond is executive vice president and senior consultant at

Written by Investors Wallets

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