Last month in this space we discussed how advisory firms are enjoying record levels of profitability that would make them the envy of most other industries. This was revealed in the research conducted by Philip Palaveev of the Ensemble Group and BlackRock, and we thank them for bringing that research to our readers.
In this month’s cover story, senior writer Jennifer Lea Reed examines recruiting and compensation trends in the independent broker-dealer world, which is also experiencing repercussions from the escalating battle for advisory talent. Different firms are embracing different strategies, and some, like LPL Financial, are recruiting very aggressively as others stay far more selective.
But some advisors affiliated with broker-dealers have been taking a longer term view. They want to see beyond the up-front forgivable loan they are being offered to join a firm and know what the potential long-term value of their firm could be a decade from now. Broker-dealers and custodians are, in effect, the back offices for all but the largest advisory firms, so it’s little surprise that many advisors are seeking their support and technology to empower them to take their business to the next level.
Still, there is a limit to how much growth a small group of senior advisors can achieve without adding capacity, which means bringing in younger advisors, many of whom are going to expect a piece of the action to consider remaining at a firm for the duration of their careers. This month Palaveev explores the option of offering these employees synthetic equity to achieve this goal.
Synthetic equity can take several forms, which he describes in detail. But as the value of some firms, particularly large RIAs, has soared, it would appear to be an effective alternative to traditional equity, which has become so expensive it’s now out of reach for many young advisors.
Synthetic equity has another advantage. In most cases, it doesn’t tie an advisor to the firm to the degree traditional equity does.
Of course, for young advisors launching firms in the post-pandemic world—and there are many—it remains to be seen whether advisory firms will command the spectacular multiples they have in recent years. In particular, the valuations of RIA firms in the private markets seem to many people to be stretched. But as long as assets under management keep rising, private equity investors and others aren’t complaining.
Still, many advisors are likely to retire in the next decade, and the big challenge is going to be replacing them with younger professionals who can not only service existing clients but bring in new ones. That story has yet to be written.
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