Welcome to the latest episode of our podcast
series for financial advisors.
Today's episode is
succession and liquidity, key
considerations and options for founders and next gen.
It's a conversation with Jeremy Holly, Executive Vice
President of Strategic business Development and Jared Finger,
Senior Vice President of Lp p Financial. I'm
Mindy Dim, and this is the diamond podcast
for financial advisors.
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09:08
8791002.
There's 1 area in wealth management that seems
to have trouble keeping locks with the growth
and evolution of the industry and that's succession
planning.
Research studies indicate that less than 30 percent
of advisors have a succession plan in place.
And many more who run thriving businesses have
no strategy at the ready should a worst
case scenario leave them unable to attend their
clients needs or even continue their livelihood.
In a recent episode with Jeff Brown from
Strat private wealth, It wasn't until a coaching
session got him thinking about the future that
planning for succession became a priority.
And likewise, there are still many other advisers
who are looking at the equity they've accumulated
in their firms and wondering how they can
access it whether it be to monetize their
life's work or reinvest in the growth of
the firm.
While there's a lot for advisors to consider,
the good news is that there are firms
that realize that there are great partnership opportunities
available with these thriving practices.
In this episode, Lp
Financials, Jeremy Holly,
Executive Vice President of Strategic Business Development and
Jared Finger
Senior vice President join Lewis Diamond to talk
about this important topic.
Jeremy and Jared represent Lp
liquidity and succession division which provides end to
end solutions for advisors looking to increase business
value and monetize the legacy they've built.
So they're here to share perspectives for both
business founders and next gen on what they
need to consider as they grow their business
and explore both the long term and the
short term.
They talk about sunset deals offered by the
houses and how they might compare to an
option from a firm like Lp,
and they dive into valuations, sharing what advisers
need to know and what steps they need
to take to maximize the value of their
business.
It's a conversation that's relevant to those in
the wire houses
independent firms, and everywhere in between, there's a
lot to discuss, so let's get to it.
Jared and Jeremy, Thank you very much for
joining us today. Thanks for having us. Yeah.
Happy to be here. Let's do Jared and
then Jeremy. If you can you just walk
us through your back grounds that led you
to where you are today. Sure. Well, I
actually started my career outside of the industry
and with deloitte in their consulting group and
after a few years, being in the consulting
world, I wanted to do something more entrepreneurial.
I wasn't sure
exactly what that was going to be, but
I stumbled into
a firm called Focus Financial partners. And, Lewis
actually remember talking to you about this because
it was the first article that came up,
when I searched focus was related to Diamond
consultants.
That was really my intro into the wealth
management world specifically into the independent wealth management
world. I was on focuses M and A
team, and I was with... The firm through
its initial public offering and then had a
really great opportunity to join some former colleagues
at high powered advisors that were taking that
firm from the its initial
evolution into its next phase as an acquire
room was really part of the build out
of an M and A team and process
at high tower advisors.
Was there for a few years and then
got a call from Lp p financial about
coming over and building out a business that
could compete with... A lot of the firms
that were acquiring independent advisors in the marketplace,
but do it in a way that was
different for many of those firms. And so
I've been here with at Lp nlp,
simply put leading our acquisitions of advisors for
the past 2 and a half years, but
have been lucky and fortunate to have been
joined by... Or have been joined by Jeremy
who came back his past summer and all.
Kick to Jeremy to give his background.
Thanks, Jared. Jeremy Holly, My background, I'm... I
like the say recovering investment banker that my
first job out of school. Did that for
3 years, and then was lucky enough to
find Lp p financial back back in early
days. Back in 2000, it's too. And so
as Jared said, I'm a boomerang here at
Lp. I I spent 19 years working at
Lp
in the finance organization and the Nash 2
sales organization back into the finance organization and
doing all things related to to to M
and A and succession along that time.
Spent 2 years at a private equity backed
Ra at Uber newport Beach, and then happily
came back to Lp p last June, and
so now had Lp Capital Partners get the...
Privilege of working with Jared and other great
leaders here at Lp, and happy to be
back. Very good. Love the backgrounds that seems
like the right building blocks. For the type
of work that you're doing today. Jared, I'm
curious from your perspective. Most people have heard
of focus and high tower and
they're by far to the most prolific and
successful acquire in the industry. So what were
some of your takeaways regarding the most compelling
parts of those models. And maybe some of
those learnings helps guide some of what you're
doing at Lp nlp. But in in your
view, even outside of Lp,
what what do you think resonated about those
business models in the marketplace?
Sure.
So I I think focus
stuck to their story from the early stages
as being a firm that wanted to back
entrepreneurs and recognizing that this independent wealth management
space had been built by entrepreneurs. And so
I think for focus, the takeaway was always,
try to respect the identity and the brand
and the way that these advisers are servicing
their clients and don't get in the way
of that, because if you're disrupting the way
that they're servicing their end clients, that can
lead to some pretty negative outcomes, And so
focus really lived by that story as we
all know for many years about backing entrepreneurs,
not turning entrepreneurs into employees, and it was
really resonated with our industry. I carried that
over to high tower with a little bit
of a different spin, and I think the
takeaway the big thing at High tower was
building an operating platform that could support entrepreneurs,
not disrupt their identities, not disrupt their brands,
but add some he in the back and
middle office to to make these firms a
little bit more success. But Lewis, I'll I'll
close out with an answer to a question
that you didn't ask me, which was what
were these firms both missing in my opinion?
And what was the the thing that actual
attracted the over to Lp. I think it
was solving for the next generation of independent
advisors. And I think that's still a gap.
They in this ag,
private equity backed to acquire a space is
thinking 2 chapters down the line about what
happens when the founders of the firms that
sold
move on, and you have a a lot
of talented next generation advisers that are within
these firms that don't have the same
opportunity. Don't have the same path, that the
sellers of the Gen 1 did. That's what
we've tried to address here at Lp is
what happens next? There's a moment in this
industry that that's clearly been going on for
some time, and I think it'll continue in
terms of M and A activity and folks
getting a really valuable
offer for their business, but But what happens
when the dust settles and you have these
next generation advisors who wanna know what's in
it for them, then that's what we're looking
to solve here at Nlp as well.
Yeah. 2 things to respond to with what
you said, Jared, and I think spot on.
I think the first is just to draw
an important distinction between focus and high tower
and Lp, with focus,
traditionally, they're investing directly into someone's own R.
We're High tower, you're talking about a central
operating platform
is folks joining high towers R and high
towers broker dealer, which is somewhat similar to
Lp p. But I think kind of important
distinctions as far as the responsibilities
and level of autonomy that an adviser has
post transaction. The other thing I'll respond to
is what you're saying about the next generation
of advisors. I see it the exact same
way that you do that many of these
M and A deals our life changing opportunities
for the founder who may be retiring in
a few years. They got a huge check
given where valuations are, they were able to
set up their clients with a compelling firm,
but there's a big gap for the next
generation advisors. I I wrote an article recently
about what I deem as next big breakaway
movement, which is breakaway advisors from R. And
I think ground 0 are these large private
equity backed roll ups, ag, serial acquire, whatever
you wanna call them, who have...
Acquired these amazing firms with great advisors, but
the advisers no longer have
ownership or much less ownership They don't have
a path of taking over the company, and
they're stuck in many regards. So I'm excited
to develop more of how Lp nlp is
solving this concept. And let's kick it over
to Jeremy. So like you said, you've been
an Lp nlp for a large portion of
your career absent the the the short hiatus
in the Ra world. So you've really seen
the firm rapidly grow, Its head count, it's
Au,
it's standing in the marketplace, etcetera. Can you
talk a little bit about... How you've seen
Lp change over the years. And hopefully, you
can be candid about where it was versus
where it is today. It's a very different
company.
Absolutely. A lot of change, a lot of
growth in over 2 decades that I've been
able been a part of this, which was
remarkable. And I think we set out very
early on we had establish some size, and
we saw the benefits of size and scale
early on, and we tried to continue to
use that as our strength of ours and
and I'll talk about how we did that.
But When I began, it was a founder
led founder owned firm, and we did things
a certain way, and we were early on
and just... Determining that fee based business, advisory
business is a really important aspect. And so
we wanna make sure we we attract the
advisors and get support advisors that wanted to
move in that direction, which is a I
thought was pretty early back in there in
The 2 thousands, which was was a great
place to be. We also saw the benefits
of being a self clearing broker dealer in
Custodian, which I think, created a advantage for
us in the marketplace and that we could
generate different economics than others could do and
Get to why that's important because we were
able to reinvest those economics and our sole
business, which is supporting advisors.
And so taking you through the journey from
Founder Led Founder Own, we then became private
equity owned in the mid 2 thousands,
eventually to a public company in 20 10,
and then blast 14 15 years as a
public company. Interesting changes along the way. We
learned a lot. We made mistakes along the
way. We applied those learnings and continued to
get better. We had, you know, highs and
lows throughout that period of time. But the
firm kept growing head count like you said,
kept growing Au. We kept investing in the
underlying business.
Investing in both horizontally
to support advisors wherever they are. I think
you took... Across the spectrum of being able
to support employee advisors,
all the way through our independent R and
everything in between. And we also invested vertically
and really scaled vertically. And that's adding more
capabilities to help advisors run more more run
driving businesses, run more efficient businesses. And so
1 of those examples is what Jared and
I do. We were able to think about
deploying capital differently. And so thinking about different
capabilities we could support advisors in their growth
and their protection of their businesses and their
legacies and being able to help them unlock
value. The of their life's greatest work in
many cases And so that's what we saw
the firm transform and now we're able to
continue to reinvest at levels that a lot
of our competitors probably can't match. And I
think it's gonna help us continue on the
journey we've been on, which is just be
able to support advisors more fully wherever they
are. Yeah. I agree with you, and I'll
give a brown of kudos or props that
everyone wanna call it to how I view
Lp nlp.
Transformation in the industry. To me, Lp p
tends to be typically on the leading edge
of developing
new business models, new affiliation options, and really
figuring out what it is that prospects or
prospective advisers want, but also how to better
support their current slate of advisers. So it's
a... I think a very good segue into
much of what we're talk about, which is
the liquidity and succession program, and I think
you have some other names for other programs
and how Lp nlp is is doing that.
So Germ or Jared, whichever 1 of you
wants to answer, Can you describe the need
that Lp p saw in the marketplace
to launch the liquidity and succession plan? And
maybe to take a step back if 1
of you can even just... Briefly describe the
value proposition of the liquidity and succession program.
Sure. So I'll kick us off. This is
Jared and I'm sure, Jeremy, we'll we'll have
some thoughts too.
Liquidity and succession in short is Lp p
competing with many of the private equity backed,
ag is roll ups, Lewis You use your
words, whatever you wanna call them, competing with
those firms, but in a way that doesn't
compromise
an advisors, identity and advisors brand, the way
that they service clients and keeps that continuity
in an independent practice
for many years to come. And I think
that the really big piece that separates us
from many of our competitors. Not only the
fact that we're not changing the name on
the door and painting the walls a different
color, is the fact that we've actually attached
to the M and A events, and and
this is Lp p using its capital to
acquire an advisors book of business, and they're
staying with Lp p or they're coming to
Lp p to do that. We can talk
more about that later but the really key
differentiator for us is that we don't have
an upcoming liquidity event in 5 to 7
years. We're not pressured by private equity firm
that backs us that is looking to get
some return on its investment. And so we're
really doing this with, and we're we're not
kidding when we say it. We're doing this
with the next 20 plus years in mind.
And we did this and this kind of
segue into what need do we see in
the marketplace.
We did this to protect the independent wealth
management space from what we saw as a
return to conformity. And we saw this trend
over the past, 20 years, it's really benefited
Lp nlp of advisors leaving models where they
were forced to sell proprietary product that they
weren't able to have their own brands or
talk to their clients the way that they
wanted to. And now we're in this place
where advisors are going back to a firm
that controls the way they communicate with clients,
controls the way they brand themselves, controls the
way that they do business.
And so we saw a need to not
only solve for Gen 1 and acquire the
book of business at really competitive market multiples,
but also set it up such that we
were giving economics and equity back to the
next generation. So they could continue on that
legacy of independence. And that is liquidity and
succession in a nutshell is solving for that
M and A event and then giving it
back to the next generation. And the reason
why we got to work and launch this
and have had so much success over the
past couple of years, is that we didn't
see anyone else that was stepping into do
it. Everyone else started to look and feel
very similar to each other, and that's not
a slight at all. Because I think they're
mostly pursuing a very similar strategy, which is
go out and acquire as much Au w
as possible as many businesses as possible. Centralize
the brand, centralize the service organization centralize the
operations, extract as much profit as possible for
the private equity banker that has invested in
the business, and grow at all costs. And
for us, we saw that as not only
a threat to Lp lps business model, because
that's contra to our belief that we should
support independent advisors however, they see fit, so
they can service their clients. But we saw
that as a threat to the industry, and
that's why we've invested so many resources in
growing this... Program and allocating so much capital
to it. We talked about it on earnings
calls. And we're very open about the fact
that we see this as not only something
that's protecting the industry, but it's a real
really big growth lever for Lp. So Jeremy,
I'm not sure if you you wanna add
everything there I would just... It's more of
an emphasis. I think that Jared spot on
and everything he said. I think we we
definitely saw a need. To be different than
what that all the models are out there
in that 1 key distinction that he mentioned,
which is per that independent business model we're
not looking to aggregate integrate all this together
and create a bunch of synergy to to
then resell and and see what happens with
the client experience are they g 2 ex...
Next gen experience with advisors.
We actually have a longer term view, and
we actually wanna get these businesses back to
the next entrepreneur and continue to perpetuate that
model, which I think is a really key
differentiator. Out of the marketplace and the need
that we saw, and it clearly is resonating
with our existing advisors that have gone this
program, as well as those outside of Lp
they're thinking about moving to help be able
to take advantage of this. Yeah. I would
emphasize as well. The really different part of
what you're doing is the fact that after
a certain...
Term or period of time. The next generation,
whether it's a family member, it's a team
member, or it's another adviser that comes into
the business, is able to fully own the
business and can do with it what they
see fit. That is something that we certainly
don't see. I'm curious though, maybe Jared because
you were front row to this. How is
this different from, let's say, focus where focus
is acquiring a portion of a business? And
then there's equity that's granted or distributed or
recycled to the next generation. How is this
a shift from that model?
I think the key difference number 1 is
that equity that's granted
comes with it, a lack of true control.
And so I question in the focus scenario,
whether or not you're ever... And I'm I'm
thinking going back pre last summer. Where focus
had management company equity and most of the
businesses that they acquired. I don't know that
as a next generation person, you really had
an open market to actually monetize
that equity. And so there's a lap of
control of your own destiny in that scenario.
And and maybe that'll change as focus evolves
and we're all watching what happens in the
press But the key difference here is that
we are really seeking to keep independent wealth
management independent. And we are keeping this localized,
and we're doing it on a practice by
practice. Basis where if there's no next generation
advisor existing in the business today, we are
helping find those folks whether it's inside of
Lp or outside of Lp If they're existing
next generation advisors that are in the business,
we are working with them and building a
transition plan such they take over that business.
And it's not having a small piece of
equity in a much larger pie, which can
sound really interesting. It is having equity in
a business that you've been working in for
sometimes 10:15,
20 years, whatever it may be by the
time that the transition is over and really
controlling the destiny on what that looks like.
And our big bet here Lewis is at
as Lp p continues to evolve and grow
and and make itself a more attractive platform
that those advisers are going to rem monetize
with Lp p down the line. That this
becomes a per program. When advisors is ready
to monetize, they go through the liquidity and
succession program, and the next generation comes into
their seat and continues that brand that independence,
and and maybe a little bit different, but
continue servicing clients without the obstruction of a
mother ship entity, if you will. Well said.
Yeah. I think that the point that the
equity that a lot of advisers get from
some of these acquire, there's not an open
or free market for it. And you can
only trade it back to the firm or
perhaps monetize it if there's some sort of
liquidity event. And you don't have any control
over how that is when it is or
who it's 2? So I I think that's
a great point. So in this model, who
is the ideal target? Is there a certain
Au requirement? Like, are the advisors mostly coming
from the outside? Maybe just paint a picture
for who this works for?
Sure. And it started
a little fair, fairly narrow, but we've expanded
the who they were the ideal target could
look like, which is good. But I think
it's largely reserved for the largest practices. It's
initially at within Lp nlp. And so think
about over a hundred million over a hundred
and 50000000 of Au. This tends to make
the most. Sense for the the larger businesses.
And we initially started, we thought that having
g 2 in place identified successor or successors,
sense was a really good place to start.
This created a really interesting bridge for them.
Well, sometimes it was sons or daughters or
just people that been there a long time,
and this was a way for them to
transition the business to the next generation without
that second generation, taken on a bunch of
debt or have for for having the the
principal seller having to con themselves to take
a discount on the valuation to it was
a really interesting
solution for that persona, if you will. But
we've found, in, getting into this. There were
other interesting targets or ideal targets. And so
We've also got a version of this that
works for folks that don't have a definitive
timeline for retirement. And so we... You mentioned
the many names we would call this. We
we call that liquidity and growth, Lewis and
that where the advisor adviser can take advantage
of all of the benefits of a liquidity
succession structure, but maybe doesn't have a retirement
plan yet, timeline for themselves yet. And we
can work with them as Jared said over
time to identify
successors,
to develop those successors train them mentor them
to get them ready for whenever that time
comes.
Interesting. And now that the model is off
the ground and you have some proof of
concept? Are you seeing that there's more interest
from folks outside of Lp or is most
of the focus is still internal?
Yes. We're finding that I think it was
less year last September, October timeframe frame. It
took this externally took this outside our our
walls, and we're finding that this is definitely
resonating.
It's resonating across really 3 major channels. We're
seeing existing Ra that are interested in this.
We're seeing plenty of Ib advisors that are
interested in this. And there's also a really
great application within the wire warehouses, and we've
got a unique solution there, I think as
well that are really good competitors to their
to the existing Sunset programs that exist. So...
And short, I think we're finding that the
story does resonate and is fairly unique out
of the marketplace. Yeah. I would agree.
Can you give an example of how a
deal structured? I mean, if you can use
like a...
Hypothetical example, you can share a multiple if
you want to, but maybe just the overall
methodology or thinking, than being as specific as
you're allowed to be, that would be great.
I'll keep it more high level because as
we've grown Lewis louis, I think our deals
have become more creative and I don't want
anyone to listen to this podcast and come
back and say that's not what you talked
about. There, it's a little bit different. But
I think that the key tenets of a
deal for us are number 1, a hundred
percent cash consideration that we're paying. And that
is very different from most of the marketplace
because Lp publicly traded company, we feel like
if if you want, equity Lp, you can
buy it on the exchange. You can take
the cash that we pay you and go
out and purchase it. Or as an employee
of Lp, you can participate in an Lp
employee stock. Purchase plan. However you you wanna
structure that, but all of our deals are
structured as a hundred percent cash. That's number
1. Number 2 is generally, we keep it
fairly simple. And we're paying in most cases,
3 quarters of the deal proceeds upfront. We
don't have growth earn that are 50 center
of the deal in year 5 or year
7 and, Lp p doesn't have to grow
by a certain amount for you to get
paid. It's fairly straightforward in that 75 to
80 percent of the consideration is paid upfront
at close. And then generally in most deals,
we have a growth earn out that's paid
in year 3, And again, different from most
the marketplace,
generally, that earn out is paid based on
the growth of assets under management on Lp
platform. And that is because in in a
really positive way, we make money as a
firm very differently from most of our competitors
in this acquisition marketplace.
And so we feel like as your assets
grow, Lp nlp grows, we're all winning, and
so we'll actually pay the earn out based
on the the growth of Au on our
platform.
Interesting. And how do you make the economics
work? So if Lp is paying a competitive
multiple
at the end of a certain period of
time, the next generation owns the business? How
do you make money on this? In other
words, what's the give up? Why wouldn't every
single person do this? If there's no trade
off? Like, happens to the the payouts, like,
how's does Lp recoup their investment?
Sure. A good question. Those listen. I think
everyone should do this. Just stuff figured.
It's really a buy down of compensation. Right?
So that's where Lp p makes.
Return on its capital here. So we're buying
the business. We're tuck your our employee model
which just where we're were able to put
the Big Lp bear hug around the business.
Take a lot of things off of the
advisers and their team's plates where we can
have them focus on clients, and we get
our return from keeping those assets on the
platform and grow them because it's Jared said,
we monetize assets as a broker dealer custodian
differently than a lot of the ag we've
talked about, but we also have essentially reduction
in compensation for those advisers. We're buying down
the station, and the the adviser team has
an ongoing pool of variable comp, but at
a lower level Ib and Ra payouts.
That makes sense So is the payout that
the adviser servicing the business or the founder
gets after the deal? Is it similar to
a payout perhaps that? Someone who sold their
Ra would get. Maybe it's a 25, 30,
35 percent payout instead of a 90 percent
payout or 70 percent net of expenses.
That's exactly right. So in in the traditional
deal structure an adviser that sells... And also
any other advisers that are servicing the practice
alongside that adviser, and that's an important distinction
because we do think about that holistically. It's
not just that the seller is paid that
30 percent of top line revenue. It's that
any advisors servicing the clients, can be included
in that that variable payout bucket, but typically,
it's 30 percent of revenue, which we feel
like is generally the minimum if you will
to incentivize folks to come to work each
and every day.
The other interesting point there is that that
30 percent is generally only fixed in the
earn out period for us to and this
is where we start to incentivize the next
generation because we'll actually start to increase that
payout after we've paid the earn out to
incentivize the next generation advisors to continue growing,
and we'll increase it all the way up
to 70 percent, which is the top of
our W 2 payout grid to incentivize them
to continue growing, and again, I think very
different from most of the competition that we've
seen, which is buying a, a stream of
cash flows and fixing that stream of cash
flows. And they're going to pay the advisors,
fix them out based on the deal that
they structure. We don't really view it that
way. We view again, growth as something where
all of us win, and we don't want
to hinder the growth of the business and
own the economics on that forever. And so
we'll actually increase that payout over time for
forever advisors that are in the practice. Very
interesting. So as we're talking more about this,
the best comparison I could think of in
the marketplace
is a warehouse sunset deal, whether it's the
Ups Alpha program,
Merrill Ct,
Morgan Stanley, Sap, Wells Fargo Summit. And most
firms have some sort of derivative of the
same concepts, which is
advisory retire, they're getting a lump sum payout,
typically over a couple of years,
next generation takes reduced payout, and then they're
getting full revenue credit for the business at
days end. I know there's some major differences
with this program, presumably on tax treatment and
the like. But maybe you can just take
a second to compare
this deal that that you all are featuring
to a typical warehouse sunset program.
Sure. I'll take this 1. I'll start off
that So 1, you did hit on the
tax treatment and and disclaimer that we encourage
anyone who sells their business to Lp p
to retain their own tax
representation. To help them sort out the recognition
of the gains that they're being paid. But
that is a really important distinction. I think
that, like, a little bit higher level than
that what we're buying from any adviser that
does a deal with Lp p similar to
everyone else who's in this industry outside of
the is the client relationships. We are buying
the clients a goodwill from the advisors that
have been servicing the clients. And I think
that is quite different from a traditional warehouse
sunset program because in most cases,
on that side. It's just an ordinary income
payment. Right? You're buying down the compensation that's
being paid to you. You don't actually own
the clients in the warehouse constructs. So you
can't really make the case that this should
be a long term capital gains event that
you're selling any kind of goodwill. And so
that's a key differentiator for us. But I
think more importantly than that is just the
ownership of your destiny over the period of
time in which that the next generation participating
in this deal, or even the selling advisors
participating in this deal. Most of those sunset
programs dictate, pretty specific timeline for an advisor
to kinda transition out or take less of
the business after they've quote, unquote, sold to
the mother ship
For us, we recognize that retirement in this
industry is not so black and white. And
I think most advisers would agree with that
that they don't know what they would do
it themselves if they weren't servicing clients. So
maybe they wanna stick around 1 or 2
days a week or just be in more
of a business development capacity, and We have
the flexibility on our side to recognize that
those outcomes can be really positive for a
business where maybe next generation is steering the
ship, but the selling advisor still around building
business, whether it be on the pickle ball
court, which I think is more popular than
golf or the golf port. But in any
case, there's... I think the flexibility that we
have to structure something that really meets both
the selling advisors needs and the next generation
advisors needs is a is a key differentiator
there. And then I think the third piece
is just this successor advisor program component of
what we've come up with is very different
from what a sec... Successor, a next generation
advisor signs up to in the wire in
that, again, we want you to control your
destiny. And as Jeremy mentioned, this is built
on Lp p 2 model, which is a
really fast growing component of Lp lps platform,
but we've got other affiliation models inside of
Lp. And so if someone decides that is
at the end of this transition period, they
really wanna run their own R. Well, they
can custody you with Lp and there's really
no transition, and there's no disruption and they
don't the break away from anywhere. Or maybe
they decide they just wanna be paid in
a 10 99 capacity, which is obviously our
bread and butter. They can go and do
that as well or they can stay in
the W 2 construct and Jeremy describes it
as a really nice Lp p Bear hug.
I describe it as 1 of the few
Fortune 500 companies that has an operating platform
supporting advisors.
Who can just show up to work and
service their clients. And so we're betting that
a lot of folks will wanna stay in
that construct as well. But again, the flexibility
to do what you want after that transition
period over is is pretty different for most
of those programs. Yeah. I think that's very
well encapsulated and it's thinking that the... With
the wire sunset deals, the retiring adviser monetize,
they're on their glide path out. They retire
the next gen adviser, is putting in all
the sweat equity to keep the client relationships,
manage the business, they get a lower payout
over the duration of the deal, which is
reasonable to in essence payoff the... What the
retiring advisor got. But in the day, the
employer is still owning the business. So it's
sweat equity to in essence
transfer
ownership or retain ownership with the same entity,
which is the wire or the bank. So
to me, the most interesting element of what
you're doing is the fact that the next
generation adviser
actually owns the entity owns the equity at
days end, and then can do with it
what they want. Sell it again,
move it and have agency over what that
looks like. So it is a seemingly a
better deal for certainly the next generation adviser
especially. So well said, how do you guys
view this deal
comparing to
other typical M and A transactions that we
see in the Ra world. I think we
we've paid on some of it, the cash
first... Equity. But are there any other key
distinctions that we haven't mentioned that are worth
calling out?
I think you're right, Louis. We hit on
a lot of them and I'll just try
to summarize. So there's a lot of things
that are similar and that was designed intentionally
that way. We wanted to mirror the stuff
that was working well in the marketplace, but
then add some Lp peel flavor. And so
try deal structures are similar as we've described,
the exception there being, we're we're a hundred
percent cash up upfront. We're trying to take
things off advisors plates to make them more
efficient of def fab and focus on their
clients. So the reason they got in the
business in the first place. And so that's
similar to what you'll find in the marketplace.
But we are also protecting that local flavor
that entrepreneurial spirit. So while we're taking stuff
off the plate, we're not changing the brand.
We're not changing the the way they work
with clients. We're not changing their staff, and
making sure that we we ring fence that
and protect it. So that is somewhat unique
in the marketplace,
and then providing that path to growth, and
I think the path to g 2 is
the real big differentiator we've talked about just
to summarize that. That that is a big
thing that's different than what you'll find out
in the marketplace. 1 thing, Jared, and I
talk about all the time is it's going
to be interesting to see. And you talked
about the next breakaway wave. I think you're
spot on. But, like, what's gonna happen when
these... Private equity backed firms go to sell?
What are they gonna do to put lipstick
on the pig so to speak. What are
they gonna do to pretty it up to
make it ready for sale. What's that gonna
mean for the talent it's there, that can
mean for the client experience, and are we
gonna have a wave of next gen talent
that leads those firms when they go through
that transaction. So and so we built it
differently. So we don't have that issue.
Interesting. I was just gonna add there, Lewis.
And another key in just that to Hammer
home points. We've talked about we're not doing
this with the expectation that we bundle up
all these advisers and sell them somewhere else
in a few years.
And we're not restrained by those timelines.
And I think we're starting to see that
narrative play out in the marketplace where what
is the next trade
for many of the ag who've bought up
these advisers? And what happens next if they
can't trade? Are they going concerns for the
next 20, 25 years or what really is
the next phase of the evolution for the
Pe backed roll up. And for us, I
called that I was a key differentiator because
we're doing planning here, strategic planning that goes
out 10:15,
20 years. We built a program that rewards
advisors over the course of 10 to 15
years, and we're thinking that far down the
line,
about the perpetual nature of this. And I
think it influences everything that we do because
we do believe in the power of independent
advice. We do believe that disrupting an adviser
is not the right thing to do that
the adviser mediated marketplace is is here to
stay. And that's... Again, comes back to why
we built this and how we're investing
the resources to continue growing this and growing
our reach to both serve Lp advisors and
and welcome advisors from outside of Lp.
To participate a deal like this. Very interesting.
So, Jeremy, I had a question for you.
You've been in the Ib world with For
most of your career.
From my experience, if a independent practice under
a broker dealer is going to sell. We
typically see a bit lower
valuations than an R looking to sell. Some
of its business mix driven, is it all
fee based versus
30 percent fee based with 70 percent variable
annuities. So there's some of that. But more
importantly,
historically, we've seen a lack of capital behind
acquire who sit within a Bd. You don't
typically see private equity firms backing
Ib practices
and most often, a buyer is going to
either be the internal team, which can still
be the case, or it's gonna be a
local practice. Who maybe done 1 deal, maybe
it's just done 2 deals, but may or
may not have the
robust capital backing that a private equity backed
R or Lp p itself would have. So
I have a follow up to that, but
first off, do you agree with this concept?
And if not, how do you poke holes
in it? Sure. And I'd get that's a
position in my perspective in the marketplace for
sure. And and again, Mike... As you said,
my experience is has largely been an Lp
nlp And hills is a very large ecosystem
it may look a little differently than look
a little different than some of the other
smaller Ib
ecosystems out there. But in my experience,
We haven't found much of a difference with
valuation, which was interesting, And we actually now
fully disclosed Sponsored the study, but advisor growth
strategies did a study around that and thinking
about value... Dispel valuation this and what really
drove value within advisors that she had a
shared Ad versus those that had their own.
And there wasn't much of a difference. And
in the M and A data that we've
seen inside of Lp walls, there isn't much
of a difference in terms of Eb multiples
or revenue multiples or anything like that. What
we've found is and you... Your business mix
point is a really good. Yeah, to the
extent, the business mix is different sure, there's
gonna be a difference in valuation. But if
you take a a like to like practice
1, it looks very similar in terms of
business mix between fee based than Broker dealer
business. And they're of similar size and similar
growth rates. There shouldn't be much of a
difference in valuation. What we found is the
real big drivers of of value or the
standards, profitability,
growth. Am I in a good market that
has prospects for continued growth and expansion
And finally, and and very important 1 is
the team and talent you've got there. And
so those are the big 4 are really
what determines
valuation or a premium valuation. How advisors conduct
business under what type of construct is less
important we found. And... Because there's puts and
takes. Right? So be having your own R,
you've gotta do compliant. Gotta... You're on the
hook for that, and you got the Fcc
knock it on your door and making sure
you're doing everything above board.
Visor under a shared, like, at Lp. Don't
have to worry about that. Lp takes care
of it form. It's a version of outsourcing
and it creates scale in their business. And
so there's puts and takes there, but my
experience, I haven't seen much of a difference.
That just but 1 point, I would say
the exception of that is the point you
made. The more buyers that are well capitalized
and the on the market may drive up,
valuation, and we've seen that in the marketplace.
But the big question is how high will
that go? Will that remain Or where will
that come back? And so that's the 1
exception to though with everything. I've said Yep.
That's exactly the way that I've seen it
too with some of the transactions that we
facilitated
is that a like for like business.
The value isn't necessarily any different. Ultimately, someone's
gonna pay what they think it's worth, and
that's gonna jive the price. But I do
think there's credence to what you hit on
Jeremy about how if there's more bidder, it
has the potential to drive up the price.
So in the Ra world, if you have
25
private equity back to acquire who are gun
for a deal, naturally, you'd would expect someone
to go to the kind of the next
multiple range and competition does drive price. So
fundamentally, I agree with you and that that's
what I've seen to, the valuation shouldn't be
different, but typically with more external bidder, there's
potential to increase the valuation.
Let me go to my next question, which
is related. Let's say an Lp nlp practice
or any practice we're looking to sell to
the liquidity
succession program? Wouldn't they con get a higher
valuation if they shop the deal to dozens
of ex internal well capitalized acquire or even
shopped it within Lp nlp ecosystem of well
capitalized buyers.
It's a great question. I was going to
interrupt you guys before, but the the person
that's helping us with this told me not
to talk over, Jeremy because we're on 1
mic, so I didn't do it. But where
where I wanted to, the point that I
wanted to get to and I'll just share
an Anecdote Lewis. We were going through a
process recently
with a center of influence, who had brought
us a deal from outside of Lp, and
it was an independent. And we ended ended
end winning this process. I wanna be forthcoming
with that. But what came back was you
guys are by far paying the highest cash
multiple of all the offers that we saw.
But you're the lowest. You're the lowest offer
of all the offers that we saw. I
I think that's a key point about open
marketplace and multiples and valuation is that we
come back to... We pay a hundred percent
cash consideration in these deals. We think cash
is king. Again, we're a publicly traded company.
We'd be very happy for advisors to to
buy our stock. But in a lot of
cases, I think when you start to see
these really inflated multiples, a lot of it
is in private
e liquid equity without a confirmed date on
whether or not adviser is going to be
able to get liquidity out of that deal.
And further to that, I think we're starting
to see a little bit of a reckoning
with what kinds of multiples these ag are
going to achieve in the marketplace. And I
think a lot of the assumptions
that are built into a deal when an
advisor gets this crazy multiple and we've all
been to the conferences and we've heard my
buddy down the street got x and my
buddy up the street got y. Well, a
lot of those assumptions are based on a
firm trading at a really specific mall And
I think where we sit our opinion is
that cash is king because it's certain. And
the market clearing transactions that have happened to
affirm
those pretty crazy multiples. I have either been
to a large strategic that might not be
in the interest of the advisors that are
being sold to that place. Or into the
public markets, but we're not seeing as much
of that
anymore. And so I don't know if that
takes your question sideways, but I I think
what we question is the the validity of
this... Of the assumptions
under some of those valuations that advisors are
seeing the marketplace, and we just encourage you
do your reverse due diligence.
Dig into the numbers, dig into the valuations
that you're seeing, the projections that you're seeing,
are you banking on something that's realistic? Or
would you be better taking your cash and
putting it into a fund funds that's betting
on the best managers. I don't know. I'm
not counseling anyone either which way. We just
have a healthy skepticism
of how the industry is talking about it.
Yeah. So it sounds like what you're saying
is it's the structure matters more than the
valuation. And you feel like the structure you
have in place is perhaps more advantageous than
other bidder, even if the overall valuation might
be lower because you're not chopping the deal
to 20, 30 different,
potential buyers.
Lewis, I was gonna say something very similar
to that. I think you're right. I mean,
there's 20 to... You know, 20 25 bidder.
They all the offers look very similar.
I think Ours is very different. And the
and the reasons we've talked about. And so
you're essentially
comparing apples and oranges in some cases as
far as what the experience is going to
be on the other side, only for the
selling advisors, but also for their next gen.
And so that's the thing that they need
to evaluate is but I want 1 of
these 20 offers that all look very similar
when I'm going into a model that all
feels very similar. Or do I want something
a little bit different. And so it's all
about fit at the end of the day?
It's not all always about the highest price?
Well said, similar So either of both you,
what attributes do the best businesses have as
they go through your valuations or put another
way. If someone's listening to this, they're thinking
about how to maximize the long term value
of their business, what are the key things
they should... Pay attention to or try to
influence before they go through a transaction process.
Yeah. We spend a lot of time with
our advisors and talking about this, and we
have some interesting off. Within Lp where we
actually can hold up a mirror to the
adviser and say here, let's look at your
practice right now. If you've got a 3
year timeline. Here's some things we can do
in the interim to really get your business
ready to sell? And so things like looking
at something things we talked about. Do you
have sustainable organic growth within the business, do
you have the right talent on board and
if you develop that talent? You identified potential
successors in the business. 1 thing we've done
is we've actually looked at their the underlying
households are there some households that no longer
fit, your service model or on a good
fit for your business and can Help p
purchase them, support them with our essentially our
investor focused solutions team, a team of advisors
that can work with those
smaller somewhat mismatched households that advisors no longer
wanna support. We can do that for them,
capital for the... For for in exchange for
that and it creates capacity in the business
as well as capital, potentially deploy for growth,
which is a really interesting virtuous cycle if
you will. We have advisors that use that
partial book,
solution on a regular basis. And once a
quarter once a year, they come back and
as they continue to grow the top end
of their business, they're able to to maybe
find a better fit for their lower end
of their book of business. Just as an
example of things that folks do to get
their businesses ready for, and I'll, know, the
ultimate monetization event. Well said, Jared or Jeremy,
what's your view on where valuations are heading?
Do you think we've reached the peak or
is there room to run? I've held the
view for a while that I think it's
subsided, but it felt like the last few
years, we were approaching bubble territory, where the
price of these assets just kept going up
and up, and, ultimately,
it's hard to see how the plane was
gonna land. If, ultimately, there's a maximum amount
that the next private equity sponsor is gonna
pay. To buy 1 of these large firms,
how do they keep increasing the valuation without
some
crazy external factor happening that we're unaware of?
So to what's your viewpoint on this? Do
you think
valuations will go up? Where do we think
we've reached a point of equilibrium or maybe
valuations might go down?
I think we've reached the point of equilibrium.
And as I mentioned before, I think what
we're starting to see is a... Fundamental
question around what the exit is for some
of these private equity act firms and what
the future holds. And I think that'll naturally
lead to a normalization of where multiples are.
I don't think it's going to go down
by half. But I think some of the
crazy numbers that we've seen thrown around are
happening
less and less. And I guess what I
see from my perspective is that most of
the folks who are saying, hey, multiples are
are only going up and are are at
a record high, are the people that are
being paid directly and benefiting from multiple being
high and and and continuing to go up.
And so I I just... I questioned how
much further we can run. I don't think
it's necessarily a bubble that's gonna pop and
go down by a significant amount, but I
certainly don't think we're where we were in
20 20 or 20 21.
And I'd add Lewis, my perspective there is
what I've experienced and what I am it
is... I've seen him a bit of a
pullback in 2 ways. We had the cost
of capital shoot up with interest rates. And
that's certainly everyone thought that was gonna affect
valuations. And I believe it eventually did, but
it did in 2 different ways. When I
think the multiple overall has come back a
little bit. Back just a little bit to
something that's not as close to bubble territory
like you mentioned. As it was. And you've
seen a shift, you, Jared talked about this.
Shift in how much of the consideration was
cash versus this private equity. And so we've
seen more of the... Upfront consideration shift towards
the equity versus in the cash because of
the cost of capital and and and taking
on leverage, in the businesses. So those were
2 big things that we've seen. And then
you've got... I feel like there's this game
of musical chairs, and and a lot of
shares have been removed the music hasn't stopped
But there's gonna be a lot of folks
looking for missing shares when it does. And
we've seen some headlines around some large firms,
private back, go out to the marketplace to
try to recap
and not get the valuations they were hoping
for and having to stop that process. So
to me, there's a couple data points there
to point at that to suggest that's where
we're headed. Interesting.
A question I wanted to ask you, it
just it just came to mind as we're
we're talking about equity. So the pitch that,
any firm that has equity as part of
their deal structure
points out is that if you take some
of your deal consideration and equity, you're diversifying
your growth essentially instead of being a hundred
percent reliant upon, what clients you keep
how you grow your business
individually
Instead you have that lever, but you also
have the lever of our equities compounding at
15 percent per year, and you get the
benefit from all these... Programs we're doing and
all the M and A we're doing. How
would you respond to that? I mean, I
know
equity, we always say is
in some ways, like a lottery ticket. I
mean, I think in this industry equity tends
to be a decent bet, but we've seen
instances not naming names where that certainly wasn't
the case. Or I think I know which
firms you're talking about Jeremy who went out
to market. We're looking... We're promising a certain
valuation to their advisors and they weren't able
to pull it off. But with that kind
of example aside, how would we react to
that concept that equity is part of a
deal structure, which is different from how Lp
p does deals, is actually a pretty compelling
diversification lever for an adviser.
My... And I know Jeremy has thoughts here
too, but my initial thought...
Is that
if it's equity that is the cream on
top of the valuation that you're getting, and
you feel like you're getting a fair deal
on a cash basis and you can take
that and put it in the bank and
diversify it how you want. And then there's
an additional equity component. Then great. It's a
flyer. It's a bet on, whether or not
this firm will will compound
by 15 percent per year. But as an
adviser, if you are trading
your largest personal asset in most cases
and simply swapping the equity and not getting
much cash and you're getting a below market
multiple which we can all reference and figure
around what that that would mean. Then I
think it's not such a great bet. Because
I think as Jeremy alluded, we're not seeing
the same
exit events that we were 5 or or
or 10 years ago for most these firms.
And I think it is a little bit
of a a musical chairs type situation with
who's on the other side of the next
trade?
And I would just add and admittedly, I'm
an Lp home, but I would rather take
the cash and invested an Lp.
I think that's a better bet. Yeah.
Alright. There you go. I like it. So
Jared, I know you and I, over the
years have talked about. This concept over over
a couple of beers. But what do you
think the industry will look like 5 years
from now. In general, And then also just
overall is all the consolidation that's happening, do
you think it's good for advisors?
Well, I don't have a beer in my
hand, unfortunately, to to maybe po authenticate as
I would if I did, but
I think to thing. So 1, I do
think we are going to see...
Instead of the the continued
aggregation of advisors
into these Pe backed platforms. I think we're
more than likely going see more advisors start
to leave
And you referenced your next breakaway wave article.
I think that's very real because I think
we have a lot of talented next generation
advisors who are wondering.
Who are wondering what's next, and that leads
me to 0.2,
which is... I think this industry has to
grow up a little bit, And I think
we have to start thinking about talent strategy
from Cradle to the grave, and what I
mean by that is the independent space is
going to have to invest in adviser training
programs see the purchases that they're doing, both.
We're we're thinking about that as, I think
large Pe backed firm should be thinking about
that. And so I think that's the next
the next theme is how we're starting to
mirror maybe something like the accounting world where
you take a thousand graduates from universities and
Train them up and then they go out
in in many different ways to regional firms
and boutique firms and
independent firms. So I think that's that's a
coming theme that we're gonna see because it...
There's a real talent shortage in in this
industry. And I think what we're all gonna
find is, we've bought some really successful advisors,
but the next generation is not quite there
to continue servicing those clients.
Well said, yeah. I'd pay agree. I think
it's to really...
Interesting analogy. And I've heard the accounting firm
analogy described kind the way industry consolidation is
happening as well, where In the fifties sixties
seventies, you had all these disparate local regional
accounting firms, and then you saw the emergence
of the big 8 and then the big
4. And now you have a similar dynamic
where you have the big 4, you have
lifestyle businesses, you have some of these regional
players. And I've heard that analogy too for
the way in the Ra industry is gonna
look at days end. But I I love
what you're saying about how...
Someone or someone have to figure out the
training of the next generation because simply,
the next generation that has left to many
of these firms, They typically don't have the
same business development acumen. They may not have
the same relationship skills that the founder did.
And as those advisers leave, they go to
other industries, etcetera, there's likely a pretty big
talent shortage. Unless... Maybe Ai and other technologies
will make it so that a typical advisor
can service 300 households instead of a hundred
or whatever the typical is. But I'm with
you on that. I'm met the description. 1
last question for either of both of you,
any parting words or advice for those
thinking about their business like a business looking
to maximize the value and potentially sell it
in the future.
Yeah. I I'd say the advice I like
to give is to to be intentional about
it, determine what you want to have it
look like and and look critically at your
business, have someone hold a mirror if if
necessary to really understand areas of strength and
areas of weakness and the things that you
actually are that are actionable and you can
improve and enhance and drive towards that a
premium valuation that you're seeking and Also, it's
not always about valuations we've talked. You want
that and fit. And you want to find
the the best fit for you, your clients
and your staff. The holy trinity you the
advisor practice, if you will and making sure
you can... You've gotta sit for all of
that.
I think what I would add there. The
is
in terms of being intentional, we have plenty
of conversations with advisors who and and in
the past have dismissed the idea of selling,
dismissed the idea of succession plan, I've got
20 years.
If this isn't part of your normal... Business
planning. If you're not educating yourself on what
the marketplace look looks like. You're not only
doing a disservice to yourself, again, with your
most likely your largest personal asset, poor But
you're doing it a disservice to your clients
that have entrusted you with their assets to
your employees to your family to all of
your stakeholders. And so that's my parting words
are duh, don't ignore the chorus of voices
that are talking about M and A succession
planning because it's a really... Key part of
this industry and educating yourself now well ahead
of when you execute your event is only
going to lead to a more positive outcome
because you're gonna be an educated buyer. As
you would with most other things in your
life, and so it's just... Yeah, be intentional
and and do it 10 or 15 years
in advance, I'm sure things will change, but
stay on top of the trends, and understand
what different option is made for your business
and what the impacts would be for your
clients, etcetera, and you'll be well well positioned
to to take advantage of that eventual exit
or succession or transition, whatever you wanna call
it. I'm with you guys.
What I've found is the actions that someone
can take with intentional or to be proactive
about that can drive a higher valuation. Even
if you decide not to sell are just
really good business practices that are gonna help
your business. So I think with everything, a
little bit of planning,
education,
taking time to work on the business instead
of always being in it is always a
prescribed formula. So guys, this was really interesting
and an eye opening to me as well.
What you've created with liquidity and succession. I
think it is a differentiated offering in the
market. A pretty interesting alternative to a traditional
wire sunset deal to trading to a private
equity backed R or a roll up or
an ag.
And I think we hit on a lot
of key themes that any adviser can learn
from as they look at maximizing the value
of this immense asset that they built over
the years. So we'll have to do this
again by, thank you both for joining us.
Thanks for having us. Yes. Thanks, Louis.
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including intel on recruiting deals and our insight
and analysis on the latest trends in the
wealth management space.
You'll find it at diamond dash consultants dot
com forward slash transition work. Or if you'd
like to talk, feel free to give us
a call at 09:08
8791002.