2. Trailers – Some mutual fund share classes charge investors ongoing 12b-1 fees for shareholder services, which in many cases clients don't even know they are paying. While the fees are perfectly legal (though available only to those with a B-D affiliation), they are non-recurring.  As soon as a client sells a fund with 12b-1 fees, the advisor loses the related revenue stream.  Furthermore, trailers create a structural conflict of interest by giving advisers an economic incentive to favor certain mutual funds or share classes over others.

Ugly Revenue
While buyers place little or no value on non-recurring revenues, any business activities that are not clearly in the best interests of an advisor’s clients will LOWER the price a buyer will pay and even may scare buyers off.  Examples include:

1. Shareholder Servicing Fees – Recently, we have come across a new scam in which some “Fee-Only” firms have found a back door method to skim fees off of their clients’ mutual funds – in some cases, as much as 0.25% of client assets invested in "no transaction fee" funds. 

Ostensibly the payments are made in exchange for shareholder support services provided by the RIA.  But in reality, the advisor is doing nothing but getting paid more at the expense of its clients.  The arrangement is deceptive and creates an awful conflict of interest (it gives the RIA economic incentives to invest more client assets in funds paying the kickback). 

Advisors may hide behind the technical “legality” of the payments.  However, it’s a regulatory time bomb and at some point the SEC is going to catch on. Furthermore, even if the arrangement is legal, good luck convincing a buyer that you always act in your clients’ best interests if you claim to be “Fee-Only” but also receive product-based fees.

2. Double-Dipping on Asset Management or In-House Products -- Many wealth managers try to boost their revenues by getting into the business of creating their own in-house investment products (mutual funds, limited partnerships, hedge funds, private equity vehicles, and so on). Ignoring whether wealth managers are genuinely qualified to create these products (generally not, we’d observe, as it’s a completely different business with completely different competencies), in-house products create unavoidable conflicts of interest if advisors either:

• Double-dip on the asset management fees (i.e. charging an AUM fee on all assets under the advisor's discretion and also charging a second fee on the portion of the client's assets invested in the in-house product will bias an advisor in favor of using the in-house product in lieu of a third-party manager), or

• Charge a higher fee on the in-house product (i.e. charging "2 and 20" on a hedge fund product gives the advisor a strong incentive to continue to move more and more of its clients' assets out of the standard portfolios, on which the advisor likely charges 1% or less, and into the hedge fund).

A wealth manager may be able to fool some of its clients with these revenue boosting product strategies some of the time. Buyers, however, know that at some point many of a seller’s clients will figure out they are getting shafted and, inevitably, head for the exit. 

Think Like A Buyer
If these conclusions sound extreme, put yourself in a potential buyer’s shoes. In an M&A transaction, buyers try to measure future earnings only; what you might have made in the past is completely irrelevant. Again, the analysis is all about risk. Stick to your business lines generating stable, predictable cash flows and abandon those that are responsible for non-recurring fees or otherwise create conflicts with your clients.