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How to Increase the Market Value of Your Broker-Dealer

Terry Mullen
Nov 13, 2018

This article is the first in a series of “Recommendations for Independent Broker-Dealers” by Truelytics. The goal for this series is to present a roadmap for the future in which IBDs have substantially higher valuations and their businesses are more stable.

If there is one thing that keeps the C-Suite teams and board members of independent broker-dealers up at night, it is the decline in their firm’s valuation multiple brought on by margin compression and a lack of long-term business stability. The perfect storm of an aging population of independent registered reps, the rise of large RIAs operating outside of the IBD universe, and the emergence of robo-advisors is hitting the industry hard.

Fortunately, most independent broker-dealers already have the seeds of a solution in their hands.

Migrate Your IBD to an RIA

The wealth management industry has been moving toward the RIA model for years now. And with good reason. The fee structure is more profitable, clients love the fiduciary relationship, RIAs enjoy more flexibility in how they manage their businesses, and the business model is more stable in ways that IBDs simply are not designed to accommodate.

In recent years, many IBDs have started their own RIAs in response to the wishes of dual-registered advisors and to adjust to where the market is headed. This is a great first step. However, the real opportunity lies in going all-in and committing to a complete migration.

Offer Ownership to Registered Reps Who Convert to IARs

One of the most significant dings to the valuation of an independent broker-dealer is baked into the business model. The fact that independent registered reps can pick up and take their clients to another IBD whenever they want is a massive business risk. No wonder no one is willing to pay a high multiple for that business. There’s no promise of continuity.

What we at Truelytics are recommending to the broker-dealers we are working with is to incentivize their registered rep population to convert to investment advisor representatives and come in-house in exchange for an ownership stake in the new RIA. How much stickier would your assets and revenue be if the advisors who managed those relationships were tied to your firm by an ownership agreement?

Not only would the advisor have a vested interest in the continuity of the business, but the clients the advisor manages would become clients of your RIA. Suddenly you would own the end client. That changes everything.

Client Ownership Increases Business Value

Most clients have only the foggiest idea that the IBD their advisor uses even exists. That’s a problem. In fact, it is a really big problem in today’s market.

The problem goes beyond brand awareness, or lack thereof.

The real issue is that IBDs are designed to not have relationships with the clients of their advisors. That may have made sense back in the days when margins were fat and information was a scarce resource.

But as prices have fallen and financial consumers become more aware of the choices available to them, it is simply too risky to lack the ability to interact directly with the clients of your advisors.

Independent broker-dealers are now operating in a market where many financial consumers are opening accounts with RIAs on their phone. Most of these consumers have no relationship with an individual advisor. Instead they use XYZ Robo Advisors to manage their investments.

Now more than ever it is crucial for your business to own the client. Until now, the client of an IBD was the registered rep. It’s time to pierce the veil and extend the relationship down to the end client.

Client Acquisition, Growth, and Retention are Easier in the RIA Model

The valuation of a business is almost always tied to the confidence the market has in the business’s ability to grow. Or if the business is seen as a dividend (cash cow) play, the reliability of the business’s earnings are considered more heavily. If the business is growing and has reliable earnings performance that almost always results in a higher valuation multiple.

The RIA model offers some significant advantages for both valuation drivers:
  • Client Acquisition & Growth - Converting to an RIA improves client acquisition and relationship growth because the enterprise now has the ability actively market the business to financial consumers and existing clients. This removes the hodgepodge of marketing activities from the hands of advisors and allows professionals to take the wheel.
  • Client Retention - As mentioned earlier in this article, bringing registered reps in-house as IARs creates a new vested interest mentality. More importantly however, the IBD turned RIA now has the ability to engage with clients fully and put in place continuity and retention processes. Even the most basic communication interactions via phone, online chat, and email can be standardized and designed to maximize the client’s long-term experience. And of course, should an advisor pass away or start to slow down as he or she ages, the RIA has the advantage of having other advisors available to step in for emergencies or structured succession.

How To Begin Your IBD Migration to an RIA

We recommend that you first get a firm grasp on the valuations of your advisors’ businesses. Your ability to present an attractive offer to come in-house as an IAR to registered reps will require you to have a consistent and transparent method of arriving at the offering price.

To assist in this process we are offering our IBD clients complementary Truelytics accounts for 12-months for their entire advisor population. Each of your advisors will be able see their valuation, how it compares with the average of their peers, and most importantly you will be able present them with a straightforward offer to convert this valuation into an ownership stake in your new RIA.

What’s Next?

In the next article in this series, we will dive into our recommendations for helping you and your advisors plan for emergency transitions. Clients have placed their trust in their advisors, yet many advisors operate as a lifestyle business with little to no plan for what happens to their clients should they become incapacitated, decide to quit, or suddenly pass away . We will share a plan for tackling this issue and making your business and your advisors’ businesses stronger in the process.

More articles related to: Valuation

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