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Am I a Tuck-In And - More Important - Do I Want To Be?

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There's no evidence that indicates the breakaway advisor trend is slowing down. In fact, for advisors looking to leave the wirehouse channel, there are more independent options than ever.  While that's great news, it means that these advisors have their work cut out for them in the way of due diligence.

The first thing to consider is the degree of independence that an advisor is looking for.  Naturally, the most entrepreneurial types will want to go it alone and create their own firm through one of the major custodians - Schwab, Fidelity, Pershing, or TD Ameritrade. These are the advisors with at least $100mm or more in AUM who can't wait to look for real estate, pick out office furnishings, create their website, and hang their shingle.

Other advisors, actually the majority of breakaways, find the thought of doing all of the heavy lifting overwhelming and simply want a turnkey alternative so they can focus on client-related activities, their core competencies.  They are looking for something short of complete independence, as described above, but more independence than what they have now.

These folks can fall into two subgroups: The first are those advisors that are big enough to be standalone independents ($300mm+ in AUM) but prefer not to have to build something from scratch  and instead tuck into an established RIA.  The second are those advisors who manage less than $300mm in client assets and want up front money to compensate them for what they leave behind in the way of retention dollars or unvested deferred comp.

Most often, the only firms that will allow an advisor to monetize his business in the independent space are the strategic acquirers. So, in this scenario, an advisor could associate with an established RIA that has already partnered with a firm like Dynasty Financial Partners, Focus Financial Partners, or HighTower Advisors.

Tuck-ins are one of the most overlooked options for today's breakaways. 

TD Ameritrade recently announced that they would likely finish the year with a record number of breakaways added to its platform, and nearly a quarter of those would be tuck-ins.  A tuck-in offers many of the same advantages of having your own RIA, but without the need to build it from scratch. In one sense, it's akin to moving to another wirehouse in that the advisor can sit down and simply start doing business.

Yet, unlike at a wirehouse, there are many more creative ways to compensate an advisor in the independent space including equity in the new firm and/or upfront money, succession/transition plans for the business and more.

While the tuck-in might sound like the perfect middle ground strategy, it's not as easy as it sounds.  These are essentially "arranged marriages" and as such, require a personal, cultural and philosophical fit between the parties. So although many RIAs have invested in systems and infrastructure to accommodate growth, and wirehouse breakaways can offer many advantages to the firm (expanded skill set, succession options, etc.) it's ultimately the "fit" that determines if a deal can, and will, be consummated. 

Advisor and firm profiles may look like a "marriage made in heaven" on paper, but many "frogs have to be kissed" before the perfect match can be found.

Finding The Right Fit - A Work in Progress

John, Jim, and Matt were a primarily fee-based wirehouse team in the South doing $1.6 million on $200 million in assets.  Having spent their entire careers at the same wirehouse firm they were ready for independence. They had lost confidence in the firm's direction, as well as local management and found it harder than ever to get compliance approval for even simple client or new business marketing initiatives. 

They had two issues to reconcile about independence, however: first, they were not entrepreneurial enough to tackle creating their own firm; secondly, they needed upfront money to pay back retention money owed to their firm, as well as to take care of family issues including college planning, etc.

Initial due diligence with Focus Financial and HighTower Advisors proved not to be the right fit since the team was not big enough to join as a standalone independent.  But, as we collectively concluded, they had all the right ingredients to be a successful tuck-in.  The team is now exploring opportunities with Dynasty Financial Partners to tuck into one of their independent partner firms without having to do much heavy lifting.

As we write this column, John, Jim, and Matt are assessing the following check-list items with the firms they are meeting.  All tuck-in advisors should consider the following:

-- Economics: What does the offer look like and how is it structured?

-- Degree of independence: How much autonomy would you have?

-- Amount of control: Would you have a voice in determining firm direction? Are you comfortable with building someone else's brand?

-- Growth model: What percentage of growth does the firm want to achieve annually?

-- Future model: Would you be able to go fully independent down the road if desired?

-- Fit: Do you feel aligned with the prospective partners culturally, philosophically and ideologically?

Like with any due diligence process, the end result could be the decision to stay put if there is not enough value-add in a change.  In this case, the team could choose to stay and focus on their growth until such time as they are large enough to go fully independent. Or, like many other breakaways, they could determine that being a tuck-in is exactly what they were looking for, and they find a partner firm who feels the same. Stay tuned.

For information and interesting case studies on advisor moves, please visit our website at http://www.diamond-consultants.com/.







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