The OSJ and Enterprise Value

Written by Carla McCabe | Jul 17, 2018

We are sometimes approached by OSJs or enterprise groups who ask what their value is. Our answer to their question is rarely well-received… “Your OSJ has little to no transferable value.” That answer may surprise you too. Here’s why and what you can do to change it.

When you think about the structure of the traditional OSJ model, it’s really not much more than a cooperative, of sorts. It’s a group of advisors (or small practices) that share certain resources (at a minimum, regulatory and compliance oversight for a fee or override) and typically receive a higher payout than they would under their broker dealer's supervision.

But here’s the catch – the OSJ doesn’t own the underlying assets or advisors; they can leave at any time. Which is the main reason why there is little to no value in the OSJ. The group itself is not really an advisory firm with transferable value. Yes, there is a recurring revenue stream from advisor overrides, but given the lack of asset stickiness, that can only be valued at 1x revenue, at best. These businesses simply can’t be valued using a discounted cash flow methodology (the industry standard).

Some will argue that the value of the group lies in the relationships. It’s certainly true, but those relationships technically exist at the individual advisor level; not at the OSJ level. What’s more, if an OSJ wanted to change broker dealer platforms, each individual advisor would need to make the decision to move or not – the members of the OSJ are still individual business owners.

The truth is, OSJs aren’t going anywhere and there’s certainly a need for them as broker dealers attempt to navigate their own margin compression by shedding responsibility for smaller reps. When you break down the traditional structure though, it's easy to understand the challenge OSJs face when it comes to creating transferable enterprise value.

However, there are steps you can take to begin to create (or increase the) value in your OSJ and transform the old model into a superior OSJ model - one where it becomes so much more than just a higher payout for the affiliated reps. For example, providing high-touch value-added service offerings to your members can strengthen the advisor relationship and improve the stickiness of those underlying assets. This can include services such as: cutting-edge technology (above and beyond what your broker dealer provides), an in-house marketing team, turn-key office space, business coaching, and practice management programs.

Another differentiator is to provide a dedicated management team, where the principals of the OSJ don’t manage a book of business or act in an advisory role. This can often serve to build a reputation that the affiliated advisors come first and can facilitate a sense of community within the network, thereby enhancing the advisor relationship.

Lastly, it’s also smart to consider a succession backstop program. This allows the OSJ to purchase an advisor’s assets in the event of death, disability, or retirement. Everyone wins when you create a mechanism to gather assets and offer a smooth transition for your advisors. If an OSJ is able to own actual assets, while providing a comfortable glidepath exit for their advisors, the storyline around value obviously changes from one of a 1x override revenue to a multiple of asset-generated cash flow.

While the affiliated advisors will always be entrepreneurs who run their own businesses, the OSJ model can (and should) be improved to one that strengthens the loyalty between the OSJ and the advisor. It's not that the advisors can't leave the OSJ, they just won't want to. When you reach this level of mutual commitment with your advisors, you set your OSJ on course to transform the way it’s viewed and valued.