Unique Ways Wealth Advisors Can Build Personal Wealth from Their Practice
Unique Ways Wealth Advisors Can Build Personal Wealth from Their Practice
This article covers different and unique ways advisors are able to create personal wealth from their wealth building financial practice. Let’s begin by highlighting how any business generates wealth for its owners.
This includes:
Salaries
Bonuses
Profit distributions
Partial equity sales
Stock appreciation
and ultimately, the sale of the business or remaining equity for an exit strategy
Independent advisors operate in a unique industry with distinct business models that offer additional opportunities to build wealth beyond equity-based benefits.
Other Ways Advisors Can Enhance Their Personal Wealth
Partial Asset Sales: As a business matures, advisors can sell a portion of their client book to create one-time cash events. This capital can then be reinvested for growth or provide financial security for the future. Selling segments of clients allows for incremental cashing out, whether to slow down or to offload those clients who generate the least current and potential revenue while requiring a disproportionate amount of time or stress.
Self-sustaining, non-owner-operated practices are highly coveted and in demand. But the demand for scale always surpasses the demand for expansion; there are more advisors looking to add $25 million to $100 million in assets for scaling benefits than there are buyers for established, fully functional practices. For sellers, this imbalance is advantageous, as it means numerous buyers are willing to pay full value often without the need for seller financing.
Book Value Appreciation: The advisory industry has a distinctive M&A aspect that many other sectors lack: the ability to sell a client base, in whole or part, independent of the business itself. In today’s market, the value of recurring revenue books can range from 2.5 to 3.5 times their revenue. To illustrate, a $1 million book sold at a 3x revenue multiple nets the seller more profit than a $1 million revenue practice with a 30% profit margin, which might sell for a 6x to 9x EBITDA multiple.
Essentially, advisors can sell their recurring revenue books at premium revenue multiples that are close or surpass what they would gain from selling the business itself. Many advisors are eager to purchase your clients to maximize their current service advisor capacity or to get to the next payout grid tier. There are no shortage of buyers who are happy they aren’t taking over additional staff or office space, as they already have both in place. So with office staff or without sellers have plenty of buyer options.
Advisors have other options for building wealth through monetizing their practice including...
Recruiting Monetization: Advisors can monetize by moving to a different broker dealer or even to a custodian when bringing net new assets or could find hundreds of growing firms who would love to pay a bonus or pass on the bonus they receive for recruiting to have an advisor like you at their firm. The more revenue you have the bigger the bonus potential. 20% to 50% is a typical bonus being paid for under $1M revenue and 100% deals are out there for those $1M plus recurring revenue practices. These deals are provided as forgivable loan notes typically lasting 5-7 years (although some can go to 9 for larger bonuses) which doesn't have to be paid back as long as you're there, and is taxable in the year it is forgiven.
Retention Monetization: In an industry of consolidation an advisor over a career may be at a firm or broker dealer which gets acquired by another. It is common practice to provide retention bonuses in these cases. This is essentially a recruiting monetization for staying put. While of course not every advisor goes though this event, tens of thousands have.
Overrides/Payout Splits: Practice getting override from advisors and RIAs getting override from IARs. A real advantage in wealth management industry for independent advisors is being able to tuck in advisors, scale support you are already paying overhead for and receive a payout a override for doing so. When this is done in unison with selling a partial book then selling the book gets a one-time nice payment but you continue to receive the override from those clients while the advisor is affiliated with you.
Expansion Debt Leverage: Owning an independent practice provides financing leveraging opportunities for building wealth. The SBA lending program allows for an advisor to acquire another advisors practice as an expansion acquisition whereby it can be 100% bank financed - no cash down payment and no seller financing although may still have a clawback with a reserve held in escrow. Think about it. No cash down, the seller doesn't finance (thats how you closed the deal) the bank loan pays for it, the cash flow pays for the loan and then you a little extra, you write off the interest each year, knock down the loan, and pay off the loan a couple of years early. Now 7-8 years later you are debt free with a CAGR impacted practice you bought for Y is now doing X and worth Z.
Market CAGR Attachment:
While everyone I'm sure appreciates the value of CAGR and the impact it has on a recurring revenue practice you may mock me for including here. This is why I did. Advisors are uniquely positioned as an industry where their income receives the most growth as the market grows over time, just as their clients assets grow an advisor's business grows along with it by managing that growth. What's the point? The markets help advisor businesses generate a 10% CAGR if the advisors can generate what the S&P does (yes I know they don't on average). From there it is adding clients on your own from the referrals you're getting that exceeds the clients lost from natural attrition like death or winding down portfolios from age. This will vary an advisor can see a 2-3% natural attrition rate. A 7% CAGR means your business doubles in size about every 10 years. For an advisor who has a sustainable book of business right now that does organic growth blocking and tackling, provides great service, is always reaching out and checking on clients, and both asking for referrals and being referral worthy, is going to double their business every 7 to 10 years.
Different advisors build personal wealth from their practices in different ways. The beauty of independence lies in the diverse opportunities, models, and platforms available for advisors to utilize in their wealth-building endeavors. Whether through selling a portion of their book, leveraging recruitment or retention bonuses, capitalizing on market growth, or utilizing acquisition debt leverage, advisors have numerous tools at their disposal to strategically build wealth from their practice throughout their careers.
This article is authored by Darin Manis, founder of AdvisorBox, LoanBox & AdvisorLoans.