Landscape of the Wealth Management Industry - Annual...

The Landscape of the Wealth Management Industry

Annual Survey 2018

The content provided herein represents information publicly available and accurate, to the best of our knowledge, at the time of this printing. It is supplied for the sole purpose of offering an overview of the wealth management industry landscape. Advisors may find upon their own due diligence that deals vary from those presented here. If you have any questions, please contact us at 908-879-1002.

Diamond Consultantswww.Diamond-Consultants.com

Publication date: April 2018

©2018 Diamond Consultants, Inc.1.0-040518

1www.Diamond-Consultants.com

The past year reminded us that the wealth management industry has become almost fluid in nature—with change upon change begetting further shifts in the landscape.

Typically, we lead with an overview of the major updates affecting the industry. But as we were putting the final touches on this annual report, an over-riding theme emerged—and its significance is not likely to abate anytime soon.

It’s a theme that we believe grew to be a driving force for change in the industry, and it will continue to grow stronger this year and beyond. It’s what has motivated both firms and advisors to rethink and remap their courses. It was – and will be – the impetus behind the creation of so many new models that are thriving. And it’s fueling the disruption in our industry—by creating turmoil and propelling innovation.

It’s a theme that can be summed up in one single word: CONTROL.

Control is what’s driving the virtual “tug of war” between advisors: Advisors want more of it, but the firms they work for, or are affiliated with, want to give them less. It is this battle that has driven the lion’s share of advisor frustration and, in many cases, movement.

In looking back on the past year, we’ve seen the result of this struggle for control in five key trends—and there’s little doubt that these will continue to reshape recruiting in the brokerage world:

1. Firms such as Morgan Stanley and UBS pulled out of the landmark Protocol for Broker Recruiting (the “Protocol”);

2. The rise and further validation of options outside of the wirehouse world including regionals, boutiques and more varied independent options;

3. Continued dissatisfaction by advisors with big bank brokerages;

4. With the reduction of out-sized wirehouse recruiting deals, the playing field has been leveled; and

5. Consolidation within the Independent Broker Dealer (IBD) space as only the strong survive and the advent of more robust offerings in the RIA space.


Annual Survey 2018

Control is what’s driving the virtual “tug of war” between advisors: Advisors want more of it, but the firms they work for, or are affiliated with, want to give them less.

2 Diamond Consultants


The more things change, the more they remain the sameRetention and growth bonuses that were awarded by firms in 2008-09 are now fully amortized and vested, thus untying the hands of many advisors, making them free agents. And, even more noteworthy, Morgan Stanley and UBS departed from the Protocol for Broker Recruiting. Having previously lowered recruiting deals, with the submission of a short, one-page letter of withdrawal, these two firms effectively took themselves out of the game. For some time, wirehouses had ceased being the recruiting powerhouses that they historically had been. But with their exit from the Protocol, this has lead the industry to believe they are out completely.

As of this writing, it remains to be seen if the Protocol will remain intact. Will Merrill Lynch, Wells Fargo and other member firms exit as well? Regardless of what these and other firms decide relative to the Protocol, one thing is certain: The rules may have changed but advisors will not be thwarted in their efforts to do what’s best for clients—including changing firms even in a non-Protocol world.

Models outside of the traditional brokerage worldThere was a time in the not too distant past when the independent model was seen as an outlier, a place where those advisors who couldn’t cut it at the big firms would go to eke out a living in the shadows of the “real firms”. Today, this notion has been turned on its head as mega advisors all over the country are choosing to go independent, or some version of it. Consider the following:

New models have been born in response not only to a changing environment but to advisor and client needs. And top teams are migrating to these new opportunities with great enthusiasm. Perhaps most compelling is data contained in a recent Cerulli Associates report which found that the three major industry independent firm consolidators* grew their affiliated assets under management by a 5-year compound growth rate of more than 45% from 2011-2016!

Some further evidence that the independent space will continue to thrive:

• The new Republican tax plan favors business owners, making independence even more attractive.

* Consolidators (also referred to as aggregators) buy equity stakes in Registered Investment Advisor (RIA) firms and provide capital and support for ongoing operations, growth and acquisitions, allowing the firm to achieve the benefits of scale, plus access to a community of top performing independent advisors. For more information, see page 25.



• Wirehouse senior leaders are also leaving their corner offices to get in on the action. The most high-profile example is Greg Fleming, who left Morgan Stanley in 2016 after 6 years as chief of their wealth management unit, and in February, 2018 took the reins of Rockefeller Capital Management. And we’ve seen countless others.

• The investment in technology within the space has produced a more sophisticated platform, which is not only attractive to advisors, but to their clients as well.

• More traditional firms are distributing their products and capital markets capabilities to independent firms, providing the same level of access to which advisors in the wirehouse world have become accustomed.

• Plus we’re seeing sources of capital flocking to the space: Private equity firms, private investors and banks are all eager to get involved and capitalize on the potential.

• Even Goldman Sachs advisors – who historically had almost never left the vaunted firm – were drawn to the space. Out of the 5 private wealth teams that left the firm in 2017 and through early 2018, 3 of them moved to some version of independence.

• And, last but certainly not least, advisor independence is better for clients. It provides access to best-in-class solutions on an open-architecture basis, a fiduciary mindset, and the ability to customize the service model and value proposition.

The leveling of the playing fieldIn late 2016, responding to Department of Labor (DOL) guidelines, Morgan, Merrill and UBS brought down the high price of recruiting by lowering recruiting deals by almost a third. Suddenly, the delta between what these top dollar payers were offering and the economics of either independence or regional firm deals became much narrower—essentially allowing for an advisor’s choice to be based upon what’s truly best for the business and clients versus who was the highest bidder.

Advisors who signed retention or Growth Plus deals in 2009 at Merrill Lynch or UBS respectively are now fully vested. Morgan Stanley advisors who received retention deals as a result of the joint venture with Smith Barney in early 2009 will become free agents at the end of 2018. As a result, these firms will become vulnerable to attrition, especially at a time when advisor satisfaction seems to be at a low point, and there are more legitimate options from which to choose.

As more advisors become free agents, the big firms will likely attempt to tie them down again.



As more advisors become free agents, the big firms will likely attempt to tie them down again. In addition to exiting the Protocol, will they also redraft retiring advisor succession programs, cut payout, change to salary/bonus, or add Garden Leave provisions to employment or partnership agreements? Certainly, UBS’ February 2018 flip-flop pronouncement that FAs receiving their 2017 bonus payments must sign new non-solicit agreements, only to delay this stance until next year after out-cry from their advisors and continued media coverage, shows that the big firms are doing all they can to further lock the door in an attempt to keep advisors in their seats. Regardless, independent, regional and other firms properly positioned could be the big winners: That is, firms willing to be creative and tap their deep pockets to come up with ways to help these prospective breakaways monetize in the short-term and still capture the real, long-term benefits of being an entrepreneur.

Options and opportunitiesWhile the wirehouses have lost some of their luster, they definitively remain an appropriate home for a large swath of the advisor population. Those who value a big-name brand, robust access to an all-inclusive suite of products and services, a turnkey environment of complete support, and one-stop shopping for investments, banking, lending, etc., will continue to practice under their umbrella despite some of the frustrations that go along with being a big firm employee.

Regional firms remain an attractive and viable alternative for advisors, offering the best of advisor-centric culture, robust platform and much smaller advisor ranks. Historically, regional firms such as Raymond James, Stifel Nicolaus, RBC, Janney Montgomery Scott and the like were considered “also rans” in the eyes of most financial advisors. Clearly, that is not the perception any longer as these firms have substantially upped their game, becoming recruiting juggernauts and legitimate landing pads for top advisors who are looking to leave their mega-firms. According to a recent US Broker/Dealer Marketplace 2017 Report by Cerulli, regional broker dealer assets climbed 9.1% year-over-year, 1.9% quicker than the industry’s 7.2% overall rate. It would seem that advisors of all sizes value smaller firm culture, easier access to top management and less bureaucracy.



We have also continued to see the entry of new players and the reemergence of old names, particularly in the independent space, that offer financial advisors opportunities to explore diverse practice models. Firms like Raymond James, RBC, Snowden Lane Partners, Steward Partners and William Blair, and industry newcomer Cresset Wealth Advisors, have emerged or repositioned themselves to offer new and exciting options for those who are looking for career alternatives. Additionally, firms such as private equity investor Focus Financial Partners, and platform firms Dynasty Financial Partners and HighTower Advisors, that were born about the same time as the onset of the 2008 financial crisis, have continued to be successful in attracting top quality high net worth fiduciary-focused teams to their platforms. First Republic Bank is quietly and successfully landing high-profile, corner office wirehouse teams that are seeking uber-transition deals, entrepreneurial-spirited management and a true referral source to accelerate growth. We believe that First Republic will continue to be a firm to watch in 2018.

In the Independent Broker Dealer (IBD) space, smaller IBDs have had difficulty absorbing increased regulatory costs, and we expect to see continued compression in this space as a result. That being said, IBD affiliation remains an attractive alternative for advisors looking to go independent, while still retaining ties to a strong broker dealer that offers back office support, compliance and some upfront money to assist in the startup of a new firm.

The IBD model itself is evolving to better meet the needs of fee-based advisors who want access to an RIA platform but also want the continued support and resources their broker dealer provides. As a result, many IBDs offer advisors the ability to practice as an RIA hybrid, either on the corporate ADV or their individual ADV, thereby bridging the gap between the IBD and RIA spaces. Firms like Commonwealth Financial Network, Securities America, Raymond James Financial Services and Kestra Financial are seen as high-quality homes for advisors looking for a strong broker dealer affiliation. Another trend that has taken shape is the movement of advisors within the IBD space itself. For them, the IBD model is ideal, but they feel limited with their current IBD’s product, platform and technology offerings, as well as business consulting resources and oversight environment. This can readily be mitigated by moving their practices to another IBD that is more in line with the current and future needs of their businesses and clients.

The big winners: Firms willing to be creative and tap their deep pockets to come up with ways to help prospective breakaways monetize in the short-term and still capture the real long-term benefits of being entrepreneurs.



The Registered Investment Advisor (RIA) space continues to see year-over-year growth of assets, firms and advisors. As an RIA or RIA hybrid, the advisor acts as a true fiduciary, offering clients conflict-free advice and creating competition for price and service. In this model, an outside custodian such as Schwab, Fidelity, Pershing or TD (the “Big 4”) holds assets on behalf of the advisory firms’ clients.

Exemplifying the ultimate in independence, the RIA model offers complete freedom, flexibility and control to the advisor on all aspects of the practice from pricing, to real estate, to technology and compliance. As an RIA, the advisor is not regulated by FINRA, but instead comes under the auspices of the SEC. The only notable exception is the advisor who chooses to retain his Series 7 license in an effort to maintain some accommodative commission-based business. In this case, the advisor uses a “friendly” broker dealer that clears those trades. That portion of the business would still be regulated by FINRA.

This is the model to consider for those with a strong entrepreneurial spirit and that want to build an enterprise beyond their own book of business. For those who want some assistance along the way, there has been a whole cottage industry born to support them—consultants, service providers and industry experts who can assist with some of the heavy-lifting required to be an RIA.

With a background on the over-arching trends, we’ll now step into a more detailed look at each category. The illustration below depicts the landscape at-a-glance, ranked in order by key characteristics of each model: From the most restrictive environments, to those models which offer greater flexibility and freedom for an entrepreneurial advisor to build an enterprise.

It is important to note that, historically, as we moved from left to right on this continuum, the amount of transition money offered by each model decreased. In the last 6–9 months, the wirehouses have gone from being the highest bidders to the middle of the pack. And, in many cases, the boutique and quasi-independent firms have picked up the mantle of offering the most aggressive recruiting deals.

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)

Registered Investment

Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE

LESS FREEDOM, FLEXIBILITY, CONTROL MOREMORE RESTRICTIVE LESS


Private Banks and Bank Brokerage Firms

Despite the prestige and ultra-high net worth client base that private banks serve and the natural referral source they can provide advisors, they are generally the most restrictive models insofar as advisors typically have less freedom to run their practices the way they want. Bank brokerage firms such as Wells Fargo, Chase, Citi and PNC offer built in referral mechanisms for advisors and represent a good way to build a business—but in a model that might be outgrown over time.

Private banks typically compensate their advisors on a salary/bonus basis. UHNW-focused bankers and investment advisors believe in this model because they like the referral mechanism from the bank and the guaranteed salary structure. But, most bankers come to a point in their careers where they have outgrown their firm and the model. Realizing that they are receiving less referrals than they once did, and with the limitations placed upon them with respect to client service and growth, many choose to vote with their feet and go elsewhere. Where they are heading has become more fractured: From the private wealth units of traditional brokerage firms, to RIAs, to boutique firms and quasi-independents.

Traditional bank brokerage units offer lower payouts than other practice models; however, if an advisor’s priority is to build an asset base, it is a great option largely because of the built-in referral source. Banks are, by nature, an interdependent culture where bankers and brokers rely upon each other for referrals and support. Banks have come to realize that they are in the unique position to garner greater client wallet share through the development of wealth management programs that seek to control all customer assets—personal, business and retirement.

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



Private Banks and Bank Brokerage Firms

Features of a bank brokerage affiliation are as follows:

• Compensation within private banks can be salary plus bonus or commission-based depending upon the institution.

• Traditional bank advisory units accept advisors with minimum annual production at or around $300,000.

• Best source of referrals for advisors.

• Many banks have advisors sit in their branches to better service clients.

• Clients are often seen to be more loyal to the bank than to the advisor. If an advisor wants to leave a bank brokerage model, he will need to worry about the portability of his business and his employment agreements containing restrictive covenants, as the bank “owns” the clients. Most bank brokerage models are non-Protocol.

If an advisor’s priority is to build an asset base, private banks and bank brokerage firms are a great option largely because of the built-in referral source.


The four wirehouses, Morgan Stanley, Bank of America/Merrill Lynch, UBS and Wells Fargo, continue to be the most recognized wealth management names in the industry. As a group, they offer turnkey support, world-class platforms, outstanding technology and a solid training ground. They also tend to have heavy-handed compliance departments and more layers of management, allowing for less flexibility than some other alternatives. But, their one-stop shopping access to anything an advisor needs to support his business makes the wirehouses a destination of choice for many.

More than ever, wirehouses are disinclined to support longer-tenured advisors producing less than $500K in annual revenue, yet most still value rising stars (i.e., earlier tenured advisors whose revenue and assets are growing).

While the wirehouses have lost assets to other models, including independence, they are still the benchmark by which every other firm compares themselves. Their size and scale allows them to invest in and innovate with respect to technology, platform and infrastructure like no others can. Of late, the wirehouses have become active and hungry acquirers for independent business owners looking to offload the day-to-day minutia and a way to monetize their life’s work.

Wells Fargo continues to have widely publicized difficulties. However, by remaining in the Protocol, continuing to pay deals at the upper end of the spectrum and making favorable comp changes, they are sending a message to the financial advisory world that they are interested in actively recruiting and retaining advisors, and remain committed to growing their wealth management unit. The firm also broke down the walls between its private client group and FiNet, the independent broker-dealer arm, making it easier for employee advisors to move into the independent channel without penalty.

Wirehouse Firms

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



Wirehouse Firms

Major differentiating points about the wirehouse firms are:

• Wirehouse deals range from 150–175% of trailing 12-months production upfront plus between 100 and 125% in earnouts over a 5 year period. Earnouts are paid out only on non-retirement related revenue. All are structured as 9- or 10-year forgivable loans and will add reimbursement for unvested deferred comp to the mix.*

• Cash payouts typically range from 38–44%; however, Wells is offering up to a 50% payout for teams that are producing $2 million or more annually.

• Comp grids are frequently tweaked in an attempt to influence advisor behavior and positively impact profitability.

• Turn-key access to product, platform and innovative technology.

• Average advisor production of approximately $1,000,000.

• Well-established sunset programs allow an advisor to retire from the firm and receive a pre-determined payout for the business.

In 2017, the movement of assets away from wirehouses “accelerated dramatically.” Wirehouses saw $75 billion – an almost 100% increase – move to other models.

* Deals offered by the wirehouses are currently fluid and may change frequently. This is the best information available as of the date of this writing.


One of the most refreshing shifts that we have observed over the last several years is the dramatic success of regional firms. This is highlighted in a recent Cerrulli report stating that regional broker dealer assets climbed 9.1% year-over-year, 1.9 percentage points quicker than the industry’s overall rate of 7.2%. These firms have clearly hit on a compelling formula where their combination of distinct culture, reputation, easy access to senior leadership, and more freedom, flexibility and control allows them to recruit some of the industry’s leading advisors.

Once viewed as “second class” citizens in the financial advisory space, top tier regional firms, especially post-financial crisis, continue to grow and add quality advisors to their ranks. Firms such as Raymond James, RBC, Ameriprise Financial, Robert W. Baird, Stifel Nicolaus and Janney Montgomery Scott have significantly invested in platform and technology so that their offerings are competitive with the wirehouses.

Most of the top regional firms, including Raymond James and Ameriprise, have affirmatively stated their intention of remaining in the Protocol (Raymond James specifically writes into their advisor agreements that the FA and not the firm “owns” the client). If their recruiting efforts continue as they have over the past several years, this would seem to be a logical and fruitful strategy.

Some defining features of the regional firms are:

• Top deals can range from 120–150% upfront. Some of the regionals are offering a small amount of reimbursement for unvested deferred compensation in addition to the recruiting deal. (Note: as of this writing, RBC is an outlier with a total deal of up to 300%, plus a small reimbursement for unvested deferred comp.)

Regional Firms

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



Regional Firms

• Fewer advisors and layers of management means a more entrepreneurial culture than the wirehouses.

• Compared to the wirehouses, production minimums are lower and average advisor production is around $400,000–$500,000.

• Generally, all of an advisor’s revenue earned hits the grid and there are no “haircuts” or “scrapes”.

• Regional firms have been busy acquiring boutique firms (e.g.: Raymond James acquired Deutsche Bank Wealth Management and Stifel acquired Barclays Wealth Management).

• A smaller firm feel that is more advisor-centric and less bureaucratic.

• In many cases, regional firms can be seen as the ideal home for the advisor who is “not-quite-entrepreneurial-enough” to go independent, yet wants more control and freedom than the wirehouses allow.

A recent Cerrulli report stated that regional broker dealer assets climbed 9.1% year-over-year, 1.9 percentage points quicker than the industry’s overall rate of 7.2%.


Over the last few years, the waterfall of possibilities for top advisors has expanded and at the same time, the number of boutique wealth management firms has significantly decreased. As examples, Deutsche Bank’s wealth management unit was acquired by Raymond James; Credit Suisse’s advisor force was largely subsumed by Wells Fargo; and Stifel’s acquisition of Barclays Wealth Management (formerly Lehman Brothers) has almost completely thinned the ranks. Still, the remaining players such as JP Morgan Securities (legacy Bear Stearns), Goldman Sachs, Bernstein, and Neuberger Berman, as well as a number of new entrants to the space, have continued to intrigue.

Boutique firms define themselves as those with a small number of advisors (generally less than 500) that have cachet and brand recognition appealing to high net worth clients.

As of 2017, JP Morgan Securities has been an outlier in terms of the transition packages they are offering. Plus, their small wealth management unit and the strength of the JP Morgan franchise – in a world where those that were offering high water mark deals are no longer doing so – have served them well. As a result, the firm has had huge success in recruiting some of the industry’s top advisors.

Goldman Sachs is a powerful brand and a firm that has historically done little recruiting from competitor firms. They have chosen instead to “home grow” their talent. Goldman has recently announced, though, that they plan to expand their wealth management unit and recruit competitively, but with the lowest payout in the industry and, at least until now, no plans to offer competitive recruiting deals, it remains to be seen how successful they will be.

Boutique Firms

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



Boutique Firms

Additionally, Alex. Brown (the legacy Deutsche Bank wealth management unit now owned by Raymond James), Fieldpoint Private Bank and First Republic Wealth Management have all been having success in capturing top talent from the wirehouses.

Differentiating factors of the boutique firms are:

• Focus is on high net worth and ultra-high net worth clients.

• Much smaller than either their wirehouse or regional counterparts, with approximately 400–500 advisors nationwide, so direct access to senior management is greater.

• Much more nimble than larger firms.

• Generally limited geographical footprint.

• More selective about the advisors they hire.

Over the last few years, the waterfall of possibilities for top advisors has expanded and at the same time, the number of boutique wealth management firms has significantly decreased.


Quasi-Independent Firms: The New Boutiques

For those who are looking for an option offering more independence than the big firms allow, yet still want ties to an employee turnkey model, a “quasi-independent” firm might be the answer. Quasi-independent firms offer many of the benefits of the independent space without the hassle of setting up one’s own business.

Until recently, the real hole in the opportunity set was a model that would allow a high net worth focused, multi-million-dollar advisor to gain more freedom and control than he currently has at a traditional brokerage firm without having to build an independent practice from scratch.

Models like Steward Partners, William Blair and Raymond James Advisor Select have been knocking the cover off the ball in terms of recruiting quality advisors all over the country who are generating in excess of $1mm in annual revenue, are predominantly fee-based and have squeaky clean compliance records. The folks who choose to join these firms likely explored what it meant to be fully independent, but decided that it was not the right fit. The quasi-independent model offers superior take-home economics, cash up-front, equity ownership in some cases, third party custody, and a robust open architecture platform to leverage.

Although HighTower led the way with this model in 2008, the quasi-independent space is really gaining steam as more players enter the field, morphing into “quasi-independence 2.0.” The two newest firms to emerge – Cresset Wealth Advisors and Rockefeller Global – join the likes of HPM Partners, William Blair and Snowden Lane, offering advisors a new twist on boutique firms and traditional RIAs.

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



Quasi-Independent Firms

The well-capitalized and privately-held Chicago-based Cresset Wealth Advisors – launched in July of 2017 as a high net worth focused partnership co-founded by top private equity executives – is an excellent example of a next generation quasi-independent firm to watch. They have had early success in recruiting top private banking talent from the likes of Neuberger Berman and JP Morgan. We expect Cresset to be hugely successful as many superstar advisors are finding this well-capitalized and powerfully disruptive firm appealing. The offering of cash and equity plus direct access to the private markets and tax efficient exposure to the public markets is quite compelling.

Greg Fleming’s soon-to-be-launched Rockefeller Global, backed by private equity firm Viking Global, will be based in New York City. Although it will take the next 6–9 months for Mr. Fleming and his team to build out a robust infrastructure, they will be focused on advisors from the private wealth and private banking worlds with annual revenue of at least $5mm. Offering transition cash and equity for first adopters, we’re excited to watch their launch.

Although some of the names of the firms in this category may be unfamiliar at first, as a group they offer similar value propositions and are a great landing spot for advisors feeling constricted by traditional firms, but not quite “entrepreneurial enough” to go it alone as independents. While the name “quasi-independence” may not be the sexiest, it’s what’s under the hood that really counts.

Some specific features of the quasi-independent model are as follows:

• Competitive cash transition packages individually customized at each firm. Oftentimes, equity is awarded, and an advisor has a strong voice in building the firm.

• W-2 employee status.

• Generally, advisors are not responsible for staff salaries, rent, technology, marketing, etc.

• Supported infrastructure and cutting-edge technology.

• “Boutique” feel.


Quasi-Independent Firms

• Greater control over one’s P&L.

• The ability to use one or multiple third-party custodians (i.e., Schwab, Fidelity, Pershing, Raymond James, TD).

• Open-architecture access to the industry’s top thought leadership and best-in-class products, service and solutions.

• Much greater control, flexibility and freedom than at traditional brokerage firms.

• Payouts approximating 40–60%.

• Full back office support including payroll, accounts payable, HR, marketing, IT, legal, accounting, etc.

• Firm handles the complexities of finding office space, setting up technology, managing compliance and handling legal matters.

• Ability to get the best of the traditional brokerage and independent worlds in one place.

While the name “quasi-independence” may not be the sexiest, it’s what’s under the hood that really counts.


The independent broker dealer (IBD) model has seen perhaps the greatest evolution of all the models discussed. There has been increased sophistication and creativity in areas such as technology, investments, platforms and planning. The IBD model offers greater freedom, flexibility and control, where the advisor becomes a business owner with a gross payout between 80–94%. This model bridges the gap for advisors who feel the tug of entrepreneurship, but still want the oversight, support, ease and accessibility that an independent broker dealer provides. The advisor is responsible for managing all the “heavy lifting” on a local level such as real estate, staff, office equipment, etc. Alternatively, advisors can plug into an existing independent firm – thus avoiding many of the start-up costs associated with opening a new office – and take advantage of increased operating leverage and scale opportunities. Examples of IBDs include Ameriprise Financial, LPL, Securities America, Wells Fargo Financial Network (FiNet), Raymond James Financial Services, Kestra Financial, Commonwealth Financial Network, Cetera Advisors and many others too numerous to list here. We have seen considerable consolidation and compression in the IBD landscape as a result of the increased regulatory costs that these firms have been forced to incur.

However, even more compelling than the continued consolidation of firms in the IBD space is the huge increase in the number of FAs recruited from the wirehouses to the IBD world. According to InvestmentNews, the three largest IBDs (LPL Financial, Ameriprise and Raymond James) saw a 42% increase in recruiting in 2017.

A noteworthy mention is Kestra Private Wealth, an exciting anomaly in the landscape. As a multi-custodial, RIA hybrid model, Kestra straddles the IBD, RIA and service provider worlds. Specifically built for wirehouse breakaways, Kestra Private Wealth offers a fully turnkey build-out of an independent office, a strong investment platform and integrated technology, plus ongoing support, including compliance. It is a comprehensive solution that removes much of the heavy lifting associated with going independent and

Independent Broker Dealers (IBDs)

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



Independent Broker Dealers (IBDs)

offers one of the most aggressive transition deals in the independent space, all while still allowing advisors to self-brand and retain 100% of the equity in their business.

Notable features of practicing in an independent broker dealer model are:

• Most commonly, upon transition, 10–15% of t-12 is offered to defray start-up costs. There are a few outliers in the IBD space that will offer 40–50% in cash upfront for multi-million dollar teams.

• Net take-home pay is typically between 55–70% after expenses.

• Access to strong research and back-office support.

• Appropriate for the advisor whose book is a mix of fee-based and transactional business.

• Ideal for advisors who do not want to be solely responsible for oversight and compliance.

• Ability to build advisor’s own brand.

• Autonomy to decide what is right for the client.

• Absolute ownership of clients and accounts.

• Ability to structure and control overhead to better manage “bottom line”.

• Freedom to monetize and sell book on the open market.

• Compliance in the IBD space is governed by FINRA. As a result, advisors affiliated with IBDs will have greater flexibility and fewer restrictions than employees but less freedom than they would have in the RIA space.

• Average production is approximately $300,000–$500,000 but, as time goes by, more and more multi-million-dollar teams are moving toward this space.

• Looking to attract wirehouse advisors and working to establish true “turnkey” solutions.

• Recognizing the importance and lure of the hybrid RIA space, IBDs are perfecting their hybrid solutions.

IBDs have seen perhaps the greatest evolution of all the models discussed. There has been increased sophistication and creativity in areas such as technology, investments, platforms, and planning.


For the maximum in freedom, independence, open-architecture and client-centric holistic practice capabilities, the Registered Investment Advisor (RIA) model is optimal.

The RIA channel offers complete separation of custody, product manufacturing and advice. In this “buy side” model, the advisor becomes an institutional client of “the Street” and has the ultimate say as to where clients’ assets are custodied and who manages them. As such, advisors can provide a pricing model to clients that is more transparent and customizable and offers greater predictability in revenue.

According to a 2017 report of the Investment Adviser Association, assets under management at Registered Investment Advisor firms grew 5.8% to $70.7 trillion, and the number of firms increased by 2.7% to 12,172.

The largest RIA firms now account for more than half of all client assets in the channel, and their share continues to grow. As a recent report by Cerulli Associates found, there are 687 retail-focused RIAs with at least $1 billion in client assets under management. Those firms account for only 3.8 percent of RIAs, yet they now collectively oversee 60 percent of the channel’s assets, or $2.4 trillion. The majority of other firms in the channel (72 percent) are much smaller, with less than $100 million in assets on average. That being said, 2017 was the first year in 5 years that RIA assets did not grow more than other channels. The Cerulli report still projects continued annual growth for RIAs.

We strongly believe that the fiduciary mindset of the RIA is where the puck is headed. Regardless of the ultimate outcome with the Department of Labor’s Fiduciary Rule, the expectation of clients that their advisors act as fiduciaries has become the new normal.

Registered Investment Advisory Firms (RIAs)/Hybrids

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE




In the RIA sector as in the IBD space, the advisor controls his practice and is fully responsible for its success or failure—which takes a certain self-confidence and risk tolerance that not everyone possesses. RIAs are responsible for their own compliance and oversight and have the freedom to set fees for advice, charge more for sophisticated financial planning, bill clients for consulting and ancillary services such as tax preparation, estate planning and concierge services, as well as engage more freely in outside business activities.

As an RIA, you are free to custody with one or multiple custodians. Custodial firms include Schwab, Fidelity, Pershing, Raymond James and TD Ameritrade. For the advisor who does not want to “go it” entirely alone, or doesn’t have adequate resources to do so, there is the potential to “tuck into” an existing firm. Also, merger and acquisition potential is high in this space as many RIA principals will be retiring and do not have an effective succession plan. Most advisors do not run 100% fee-based businesses and so the hybrid model (the ability to do both RIA and brokerage business) is usually the preferred route. In this way, an advisor can still do commission and variable insurance business through the assistance of a “friendly” broker dealer (a separate business from the RIA that provides clearing and trading services to the advisor).

Relevant factors and considerations of RIAs are as follows:

• Little or no upfront money (unless the advisor chooses to take a loan or sell all or a portion of equity).

• For top teams, custodians offer “soft dollars” to defray some of the advisor’s startup costs.

• Payouts start at 100%, but after deducting an expected 30–35% of gross revenues as the cost of doing business, net payout is typically closer to 60–65%.

• Favorable long-term economics to build an enterprise with value based upon a multiple of EBITDA. Ideal way to grow inorganically and maximize overall enterprise value.

• Ability to create one’s own culture.

• RIA is responsible for its own compliance, oversight and costs, which translates into additional time spent “on the business” rather than “in the business”.



• Ability to leverage entire breadth and scope of services and support from custodians and other third-party providers together with access to “best in class” products and services on a completely open architecture basis by becoming buy side advocates for clients.

• Ability to retain operating leverage.

• Completely conflict free; advisor acts as true fiduciary, creating competition for price and service.

• Can still continue to do commission business through a “friendly” broker dealer; that is, a non-related BD that enables an RIA advisor to continue conducting commission business on an accommodative basis.

For the advisor who places the most value on building an enduring legacy and maximizing enterprise value, the RIA space may be the most exciting option.


RIA Service Providers and Platform Firms

Over the past decade, as more and more advisors moved to the RIA space and sought to replicate the resources and services they received while at full service brokerage firms, the service provider model emerged, offering support and a completion strategy. A prime example of this model is Dynasty Financial Partners which offers a customized open architecture platform that integrates technology, reporting, custody, investment management and alternative strategies as one cohesive deliverable. Unlike aggregators (see page 25), service providers like Dynasty support fully independent firms and don’t take an equity stake in them, thus allowing their affiliated firms complete control over their businesses. Their success can be measured by the stunning increase in their compound annual growth rate for assets, which saw a cumulative increase of 58% between 2011 and 2016.

By leveraging service providers, advisors retain their independence but gain access to products, services and technology not otherwise available because of their size—in such areas as transition, operations and compliance support, practice management, portfolio construction, lending and wealth management. In essence, the service providers help “turbo charge” the advisor’s practice. This option is ideal for the breakaway advisor who is going independent and looking for a full suite of turnkey services to complement those offered by the custodians. Other firms that are players in this space are tru Independence, Triad Hybrid Solutions and HighTower Advisors.

Private Banks

and Bank Brokerage

Firms

Wirehouse Firms

Regional Firms

Boutique Firms

Quasi-Independent

Firms

Independent Broker

Dealers (IBDs)


Advisors (RIAs)

Service Providers

LESS TAKE-HOME MORE



RIA Service Providers and Platform Firms

A few of the compelling features of the service providers are:

• Provides integrated access to institutional research capabilities, innovative and cutting-edge technology, financial planning resources and consolidated reporting, etc., at enterprise level pricing.

• Turnkey solution for establishing an independent practice. Acts as “general contractor”.

• Ability to take advantage of economies of scale in pricing, access and service.

• Provides back and middle office, administration, billing, compliance and other support services.

• Advisor retains 100% equity and control.

• Creative capital and succession planning solutions including financing for “tuck-ins” and acquisitions and solutions for monetizing all or a portion of the business out of the gate.

While advisors who choose to leverage a service provider own 100% equity and control of their business, creative capital solutions exist for monetizing all or a portion of the business out of the gate.


Investors in the Wealth Management Space

Overall, there is no shortage of minority investors looking to get in on the action in wealth management. As such, private equity firms, private investors and banks, to name a few, have demonstrated interest in placing bets on highly-annuitized, growth-oriented, quality advisors who are already independent and looking to expand their enterprises, and on wirehouse advisors committed to becoming entrepreneurs. In addition, firms such as Focus Financial Partners, Affiliated Managers Group, Inc. (AMG), Wealth Partners Group and Mariner Wealth Advisors have each acquired stakes in high-quality RIAs.

As previously discussed, according to Cerulli, the compound annual growth rate of their affiliated assets has exploded over the past few years. AMG itself grew by a rate of 47% from 2011-2016. “Succession solutions, infrastructure support, acquisition capital and aggregated buying power” have been the drivers of this growth according to Cerulli.

In this model, often referred to as aggregators or consolidators, an advisor sells a portion of cash flow or revenue to the acquirer in return for the ability to monetize all or a portion of his business with preferential tax treatment, and for some, equity in the overall entity. When an advisor chooses to sell a portion of his equity to an investor of any kind, he is gaining access to more than capital. He also gets:

• The ability to mitigate risk and take “chips off the table”, and to diversify his personal balance sheet.

• To retain significant ownership so he has almost complete operational control; still has ability to sell remaining percentage of business in the future.

• The ability to leverage thought leadership and strategic guidance from investors and other like-minded business owners.

• The ability to leverage a built in and funded succession plan for partners and principals.

• A strong capital partner with the deal expertise for firms that are committed to inorganic growth.

“ Succession solutions, infrastructure support, acquisition capital and aggregated buying power” have been the drivers of this growth according to Cerulli.


In last year’s release of The Landscape of the Wealth Management Industry, we posited, “The days we are currently living in might yield even more far-reaching changes.”

We didn’t realize how prescient we were in that statement—until now.

There’s no doubt that the shifts we are experiencing are the result of an evolutionary battle. This battle for control will continue to create new models and reshape or completely break down older ones. As that happens, firms that recognize the need for change will adapt and innovate in order to build bigger and stronger businesses. Advisors who are seeking new and different options that will allow them to better serve both their clients and their careers will have plenty of models to choose from. Inevitably there will be those firms that are challenged by a new world order, and for them, consolidation provides an answer. And while those open to change are likely to emerge as the biggest winners, don’t count out models that have stood the test of time—they’re deep in the labs working on the “next big thing.” Certainly, there will be more to explore in our next survey.

As always, we are here as a resource and would be happy to speak with you about any questions that this report may raise. We would be honored to be your guide should you choose to venture into this new-world marketplace, or if you would simply like to become better educated about the possibilities that lie before you.

Closing Thoughts

36 Cattano Avenue, Morristown, NJ 07960908-879-1002 | www.Diamond-Consultants.com

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