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Warning for Wirehouse FAs: So-Called Sunset Agreements Aren’t Always in Your Best Interest

December 20, 2018

It’s no secret that wirehouse firms want to keep their advisors captive. Protocol departures, shoring up non-solicitation agreements, deferring compensation, and mandating garden leave for those who choose to move to a competitor are strategies designed to stave off attrition.

And, taking things another step further, more than ever, these firms are encouraging advisors — young and old — to sign on to their succession programs. This is essentially asking advisors to commit the next decade or more to the firm — selling off their businesses and clients at the same time.

Agreeing to spend significant time in place is a decision not to be taken lightly — especially at a time when the landscape of the industry continues to evolve and brokerage firms are doing everything they can to gain as much control of their advisor force as possible.

For the advisor nearing retirement or the next gen given the opportunity to take over a significant book of business from the retiring advisor, these so-called “sunset programs” can be win-win situations — provided all are confident their firm is the right place for key stakeholders and they are willing to accept any and all changes that come down the pike.

But the fact of the matter is these agreements further bind the next gen and their clients to the firm, without control or choice — the net effects of which often include the following:

  • Cash payments can be deferred for at least five years after the senior advisor retires.
  • The next gen loses optionality and value, especially if they are bound by a garden leave, making client portability significantly more challenging.
  • As more advisors are tied up by their firms, the more expensive they become to recruit, and the less enterprise value their businesses have overall.
  • Client attrition can increase, alienated by being sold to the firm without their knowledge or permission.

And perhaps most strikingly, these retiring advisor programs have the potential of turning a wirehouse advisor — who has control over his business and the way clients are served — into a private banker who serves at the discretion of management, without ownership or control over his business.

These efforts to transform “free-will” advisors into “captive” employees could create a new generation of “stuck” advisors who have little control and far less autonomy — shifting the balance of power from the advisor to the firm and limiting any leverage the advisors have.

For both the advisor looking at a sunset program and the next gen in line, it’s important to recognize that alternatives exist in which the senior advisor can still monetize their life’s work while allowing the successor to retain a more certain level of control over their future.

The alternative that represents the path of least resistance would be to move to another wirehouse -- which may enable everyone to take chips off the table, but would likely put the next gen in a comparable “employee status” role, with all the limitations attached to it.

Regional and boutique firms are valid alternatives for advisors who still want to be employees. These firms tend to be less bureaucratic and heavy-handed than their wirehouse counterparts and are often the right option for advisors who are not interested in being business owners.

For those who do want to be business owners and have maximum control, the RIA space has gained mainstream validation as an option for advisors of all sizes, especially those managing assets in excess of a billion dollars.

While concerns over the work involved with building a firm deterred many from exploring independence in the past, an entire cottage industry born to support breakaways has emerged, with service providers and custodians making transitions and start-up easier than ever before. Plus, many sources of capital have flocked to the space for those who want to capitalize early on or buy down equity over time.

The RIA space offers key benefits for advisors, their businesses and clients, including:

  • More customization, freedom, ultimate control, and the flexibility to retire when and how the advisor desires.
  • The ability for an advisor to build a legacy and equity, the latter of which can be monetized at a higher multiple with more favorable tax treatment. (Multiples of EBITDA range from five to nine times on RIAs, dependent upon size, predictability of revenue, and growth rates.)
  • Clients benefit by access to superior technology solutions and more choice, as RIAs can shop the whole of the market.

Right now, it’s a seller’s market where advisors hold all the cards, but if the scale tips — and the balance of power shifts to the firms — this paves the way for firms to deploy more draconian control tactics — such as capping advisor comp or going to salary-bonus altogether.

All wirehouse advisors — whether signing these succession agreements or not — need to pay attention to the writing on the wall. As more advisors become captive, the less leverage, optionality and control the entire advisor population will have.

By all means, no one should allow complacency or inertia to drive the process — now is the time to wake up and regain control.