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Build Equity Value Without Having Your Own RIA?

It seems like we’re seeing blockbuster M&A deals within the RIA space each day. RIA aggregators flush with private equity capital have rolled up RIAs of all sizes, bringing together many billions of dollars in client assets while driving new valuation peaks for their firms and the businesses they are acquiring. Unfortunately, the people who are reaping the financial fruits of this trend are a relatively small group of RIA owners. In the meantime, many professionals who are doing the actual client work that creates the value of these firms – especially the investment advisory representatives (IARs) – aren’t getting their fair share. And they’re increasingly looking for more.

The FOMO Is Real Why?

Let’s start with the fact that many IARs are entering the final 10 to 15 years of their careers. These IARs know they’re not getting any younger, and they want the remaining runway in their career to align with the greatest possible economic returns on their hard work. Put simply, there is a palpable fear of missing out on truly significant value creation events. They want to continue to grow their books of business and expand their service offerings with the time they have left while positioning themselves to enjoy both a liquidity event for their book of business in the form of a sale upon retirement. So far, so good. But now, they also want to have a piece of the action in terms of the broader firm they are affiliated with, whether it’s in the form of shareholder distributions based on recurring earnings, or enjoying some of the upside in a future liquidity event – Or both.

Current Attitudes About RIA Equity Ownership Are Wrongheaded

Unfortunately, most of the RIA space hasn’t caught up yet with these shifting sentiments. Frequently, RIA firms view equity ownership in a binary fashion: Employee financial advisors with a role in the launch of the firm, or who bring in outsized levels of business, can become shareholders. But give independent IARs affiliated with the RIA equity in the firm as well? So the thinking often goes, aren’t these professionals “already taken care of” by virtue of being able to sell their own books of business someday at a time of their choosing? Alas, not only is this point of view out of tune with rising IAR concerns, but it’s also wrongheaded. Even when they are working as independent business owners, IARs directly help drive the RIA’s valuation by bringing aboard and growing client 2 relationships. And as recent M&A consolidation underscores, those valuations can result in a big payday for RIA equityholders.

A New Approach to Equity Partnerships in RIAs

As such, it’s time for RIA firms that work with independent IARs to start adopting an equity partnership structure that enables broad-based IAR ownership of the RIAs they join. Having ownership in the RIA allows IARs to have a stake in the larger businesses they are building. For RIA leaders, the ownership structure incentivizes and motivates IARs to go the extra mile to grow the business. The opportunity for an IAR to take an equity stake in an RIA potentially creates greater incentivization for them to build a bigger, more profitable business. In many ways, the RIA that enables affiliated IARs to have a true equity stake in the broader firm is demonstrating an exceptional alignment of interest, among the firm, the advisors and the end clients. An IAR with a stake in the RIA success has a clear motivation to work harder. This means more satisfied clients and a greater share of wallet for IARs, resulting in higher fee revenue and more robust profits for all shareholders in the short- and middle terms.

A Second Bite at the Apple?

In the longer term, these IAR shareholders benefit as the value of the RIA rises. As equity shareholders, they have the chance to take a second, often much larger, bite at the apple during a liquidity event. Additionally, broad-based RIA ownership allows firms to be flexible regarding the specifics of their engagements with IARs, providing individuals the opportunity to purchase an equity stake or grow their business without investing in the firm’s infrastructure. Either way, the RIA will grow. At the same time, in an age of escalating up-front checks to new recruits, large and growing RIAs that can provide an equity stake in their business as part of their partner development recruiting package will find they have a powerful new tool in appealing to successful and experienced advisors.

An Equitable Path Forward

The consolidation trends of the past few years are unlikely to slow down for some time, and the number of IARs reaching retirement age continues to rise. It is time for those who create the value within our industry to have a clear path to share in the fruits of their labor, especially as they transition to the next stage of life.

Thomas Goodson is President & CEO of The AmeriFlex Group (https://ameriflex.com/), an independent hybrid RIA and is recognized as one of the fastest growing Hybrids in America

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If you would like more information, please contact Jesse Kurrasch at (702) 987-9732, by email at [email protected] or visit us at www.ameriflex.com.

Securities and investment advisory services offered through SagePoint Financial, Inc. (SPF), member FINRA/SIPC. Additional Investment advisory services offered through The AmeriFlex Group®, an Independent Registered Investment Advisor. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF. Insurance is offered independent of SPF.

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