Cetera Financial announced a new succession and continuity planning tool on Tuesday that will “assure” a buyout of an exiting advisor’s book. The ‘Legacy Builder’ program is aimed at advisors looking to rotate out of their practice in a planned manner, such as retirement, and those dealing with unplanned circumstances such as disability and death.
“Cetera will ensure the purchase of the practice by finding a qualified buyer or financing a portion of the transaction with an existing advisor within its network and will assure the purchase of an advisor’s practice if another Cetera-affiliated advisor cannot be identified,” reads the press release.
Richard Whitworth, head of business consulting at Cetera, explains that once a trigger event occurs (retirement or unplanned exit) for an advisor in the program, the firm helps a qualified buyer take over the book. In cases where no buyer can be found, Cetera itself will buy out the practice on a temporary basis, says Whitworth.
“We are not a long-term asset manager, so we would stabilize the clients. We have an in-house account management team that deals with accounts that are left over if an advisor leaves. We would do that for that interim period of time, again, recognizing that it doesn’t take us long to sell a book of business,” says Whitworth in an interview with FA-IQ, adding that Cetera would hold on to such accounts until it found a buyer.
Experts say that a firm buying an exiting advisor’s book for succession or continuity planning when no buyer is available may have an upside but is not without challenges, even in the short term.
“The broker-dealer buying the rep's practice as a last resort does bring a great deal of security to aging advisors who lack a succession plan. But I’d be concerned about what kind of price is paid when it is the broker-dealer making the purchase and if the purchase is all upfront or over a period of time. If paid over a period of time, my next concern would be retention when the accounts are basically house accounts that tend to have poor retention records due to lack of client being serviced,” says recruiter Jon Henschen of Henschen & Associates.
Others feel that the firm having to resort to buying the advisor’s book may be more of an exception than the norm.
“There are way more buyers than there are sellers. Odds are anyone that wants to sell their practice shouldn't have too much of a hard time finding the right buyer, unless there's some sort of requirement the seller has, in order for it to be a fit that's outside the box. But for most people selling their practice, it's not really a challenge to find people that are willing to buy the practice,” says Jodie Papike, president of recruiting firm Cross-Search.
Another key part to the buyout assurance is financing deals for advisors taking over the book.
“We would look to finance the down payment of the book of business for the qualified buyer, recognizing that the cash flow that the book of business generates on an annual basis — assuming that there’s a high level of client retention through the business transition [and] that the cash flow of the book can generate enough to pay off the loan obligation in any one given time period,” explains Whitworth.
The company’s confidence in financing may come from deep pockets given Cetera’s acquisition by private-equity firm Genstar Capital last year.
“We would provide financing to facilitate that transaction through our partnership with Genstar, because Genstar has been very excited about this program, because it’s a great use of their capital to help us attain books of business,” says Whitworth.
Whitworth insists the Legacy Builder program goes beyond just the transaction itself. It begins with looking at valuing the advisor’s business through an online valuation platform provided by business intelligence firm Truelytics.
“We’re going to help the advisor value maximize or value optimize the business through practice management engagements. We’re going to help them mechanically construct the document and then execute the transaction at the triggering event, be it planned or unplanned,” says Whitworth.