How Firms Value You

Every firm puts Advisors into one of 5 quintiles.  The first identifies the “best”, going down from there.  The factors in the quintile placement are: assets under management, years in the business and your production levels (trailing 12 month production).  This is a “relative” ranking so you are placed in a hierarchy with the other Advisors in your locale and divided into the Quintiles.  Your business may be a 1Q business in Tallahassee, FL but in NYC, it would drop to 3Q.

Deals are higher for First Quintile Advisors as they are the most sought after, and go down from there.  Know your ranking before negotiating your deal.  It may be obvious, but most firms want First and Second Quintile Advisors.  As you read in the press, the smallest Advisors are being downsized.

Another factor is your ROI.  Firms like a 1% ratio, roughly $1,000 of commissions for every $100,000 invested.  They become alarmed when the number rises, not falls, as they view such Advisors as churning accounts.

Trailing 12 Month Production
The higher your production, the higher your deal.  Not only is this true given the calculation of the deal components (100% times your T12 as a sample up-front) but, the larger your T12, the higher the percentage paid in that calculation.  For example, one firm may offer a 1Q Advisor 140% of their T12 up-front, while the 2Q Advisor will be offered 120% of T12.

See below “Revenue Breakdown” for more information.

Assets Under Management
This figure is important in the context of your T12.  A high AUM with a low T12 implies that your clients are perhaps not invested or have high cash balances.  This may be their choice, but a hiring firm will not earn money on these clients (nor will you), and this will impact your deal.  A low AUM and high T12 can imply churning.  Firms are acquiring your book of business.  The AUM is a key component but they want to know that the assets are invested appropriately, diversified, and in a fashion to generate consistent income to the firm – and you.

The make up of your assets is also important.  See below.

Number of Relationships
Sometimes called “families,” hiring firms want a low number of relationships but the average size of the relationship to be large.  It costs the firm money to maintain a “relationship” on their books.  Your time, the reporting, mailing, and so on drive up expenses for each firm.  High service firms are aiming to increase the average “relationship” size per advisor.  The efficiencies are proven.

Number of Accounts
Most “relationships” or “families” have several accounts.  You may have the original client, a spouse, children, grand-children, IRA accounts.  It grows exponentially.  It costs the firm about $100 to open an account and transfer in the assets, so they are going to ask you how many accounts you have.  Clearly, the lower the number of overall accounts, the better; unless of course, every account is large and can support the costs on its own, which is just not likely.  When moving, some Advisors use this opportunity to leave behind some nuisance clients.  Be judicious in your housecleaning.

Revenue Breakdown
Some firms are interested only in fee-based income, tolerating some transactional business.  Others are more traditional and fine with a highly transactional business.  Know your breakdown and look at firms accordingly.  Additionally, know what investments you have put your clients into.  Some investments can be easily replicated at a new firm with similar fee structures (to the client and for the firm) others are not that easy to replicate.  You will be asked for a detailed analysis of your revenue by client.  Some of this revenue booked to your T12 at one firm, may be excluded from the recognized T12 at another.

Client money is tied up for a defined period when invested in Private Equity, Hedge Funds and other alternative investments.  The acquiring firm generally will not consider these assets (or the revenue) when calculating your deal as those assets will not move until the investment has matured.  Some Advisors anticipate their move and don’t roll over their client’s alternative investments, instead, holding them in cash for a brief time.

International vs US-Domestic Investments
Not all firms can hold and report on non-dollar transactions.  If you have clients holding securities on foreign exchanges be sure to map out your clients’ reporting needs.  Again, you may have to leave these clients behind and, therefore, the revenue from these clients will not be included in your recognized T12 for deal calculation purposes.

US vs Non-US Domiciled Clients
Each firm has its own requirements for doing business with clients in non-US countries.  Naturally, some countries will be harder to get approval for than others.  Every firm has a list of countries where they are not permitted to do business.  If you have non-US clients, be forthcoming with the hiring manager and decide if you would move without them.  Again, this revenue will not be included in your recognized T12.

Institutional Client
Advisors with a high percent of institutional clients will find that there may be duplicate coverage issues.  Most institutions trade across the street so are already covered by many of your target firms.  Some managers will outright decline meetings with managers doing a large portion of institutional business.  During the review process you will conduct a Client Mapping where you will share the names of your largest clients.  If it turns out that your largest clients are already covered by Advisors at your target firm, you may have to share revenue or give them up.  This is generally not an issue for those Advisors with individuals as clients.

Private Banker Moving to a Brokerage Firm
In general, private bankers don’t have a “book” of business to bring to a brokerage firm.  Some brokerage firms will not hire bankers.  Some will construct a higher back-end deal anticipating the low asset migration but recognizing the presumed success of the Advisor.  If you are moving through the process, your deal will likely be constructed using a multiple of your most recent W2 and be more heavily weighted on the back-end.

Asset Management Employees Moving to a Brokerage Firm
In general, Advisors who are currently employed at Asset Management firms can see diminished deals relative to traditional Advisors.  Depending on the recruiting environment, and how desperate firms may be at any given time, the valuation of Asset Management Advisors may rocket up or drop like a rock.  In most cases, the deals will be predicated on W2 earnings with a back-end deal that may bring them to the revenue line they currently generate.

If you have questions about revenue that you have or about your specific business, we are available to help you.  Contact us any time.