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Firms Ramp Up Succession Lending to Keep Retiring FAs' Assets In-House

By Peter Rawlings January 15, 2021

Faced with an aging advisor population and the prospect of potentially losing retiring advisors’ books of business, broker-dealers are deploying numerous measures to help with succession planning — from beefing up internal lending to providing consulting and deal resources.

“Everybody knows about the aging demographics that we have — not just in our industry, but in every industry,” says Todd Fulks, Advisor Group’s senior vice president for succession planning and acquisitions. “This is an important topic for the entire industry.”

Last year, Cerulli Associates found that 41% of advisors among independent broker-dealers were likely to retire over the next decade, accounting for roughly one-third of client assets at those firms.

A 2019 study by J.D. Power similarly found the wealth management sector was confronting a “generational crisis,” with around 20% of advisors aged 65 or older. Those under 40 accounted for only 11% of the overall advisor population, according to the study.

And yet, Jeremy Holly, senior vice president and head of advisor financial solutions at LPL Financial, says many advisors have put off thinking about succession. Fewer than half of the advisors across the industry have a plan for when they leave their practice, he says.

La Salle, Commonwealth, Advisor Group, LPL

“The challenge is finding buyers for your sellers or for folks who want to retire,” says Mark Contey, chief business development officer at LaSalle St. Securities. “We want to keep the business on our platform. The last thing I’m interested in is one of our reps selling their practice” to a different firm, he says.

Contey says he tries to proactively reach out to advisors to keep tabs on who may soon need to sell and who is interested in buying.

“We sometimes play matchmaker with two advisors or reps on our platform who don’t necessarily know each other very well,” he says. “We play a Match.com equivalent.”

“We want to keep the business on our platform. The last thing I’m interested in is one of our reps selling their practice” to a different firm.
Mark Contey
LaSalle St. Securities
Last year, LaSalle introduced a loan program to help advisors with succession deals. The program provides loans largely ranging from $250,000 to $750,000 to encourage “mutually beneficial deals for retiring and growing advisors,” La Salle said when it was announced.

Succession lending can be a huge help because “one of the toughest things with advisors is to find capital to buy the book” from another advisor who wants to retire, says Trap Kloman, president of Commonwealth Financial Network. “They don’t necessarily have it, and banks won’t lend it.”

Commonwealth provides advisors with succession loans, which have so far reached roughly $15 million, Kloman says.

“We are able to lend at rates comparable to banks without all the fees and paperwork because [of] our intimate relationship with our advisors and knowledge of their books, making it an efficient process,” he says, without revealing the rates.

Advisor Group announced in October a new financing program — which went into effect this month — for advisors to buy practices both within and outside the firm’s network. That formalized what was previously a loan program that was provided on an “ad hoc basis,” says Advisor Group’s Fulks.

Fulks says the new program already has applications, and he hopes that 10% of the deal activities of its advisors this year will take advantage of that financing. Advisor Group completed 153 deals in 2020, he says.

Advisor Group also helps match advisors who are buying or selling and assists with related aspects like valuation and deal structure, Fulks says.

LPL has built a platform resembling a “mini investment bank” to help advisors with the M&A process, according to Holly. The platform mostly services firms affiliated with LPL, though 15% to 20% are outside firms, he says.

LPL has also been ramping up its acquisition lending, which increased roughly 25% from 2019 to 2020, Holly says. The firm has provided such loans for around 40% to 50% of the deals that LPL has facilitated, he adds.

Holly believes that, generally, it is no longer as difficult for advisory firms to secure bank loans. Since advisory practices are businesses based on cash flows rather than tangible assets, banks were once unwilling to lend, he notes.

“We are able to lend at rates comparable to banks without all the fees and paperwork because [of] our intimate relationship with our advisors and knowledge of their books.”
Trap Kloman
Commonwealth Financial Network
Advisor Group’s Fulks agrees that more lenders “have gotten comfortable with this type of cash flow lending.”

Some practices “that are very large … have a tougher time finding financing,” however, LPL’s Holly says, noting some of those deals end up being financed in separate tranches.

And Advisor Group’s Fulks notes that bank loans are still “very expensive” and often involve a heightened degree of intrusion into advisors’ lives and finances that can make them uncomfortable at times.

Ultimately, firms must be cognizant of advisors’ retirement and succession plans and should view them as an opportunity to build or strengthen bonds between the firm and representative, says La Salle St.’s Contey.

“Sometimes succession is considered a taboo conversation within a firm, and I’ve never understood that,” he says. “I want that conversation and that level of transparency.”

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Tags:  Client retention , Staffing and recruiting , Retirement planning , Succession planning , Cerulli Associates , Commonwealth Financial Network , LPL Financial , J.D. Power , Advisor Group

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