Why Shareholding, Cash Injections and Back Office Changes couldn’t save this legendary brand.

Richardson Wealth was the darling of the independent brokerage industry in Canada. It was widely considered the crème de la crème of established premium brokerage firms. 

The brand was steeped rich in history and tradition, with owner-executives who were revered and respected. Back in the early 2000’s, it was the Go-To firm for the 100M+ advisor. Their bond was their word. Traditional values, trust, strong work ethic. Old fashioned values in an evolving world. 

Back in my early advisor recruitment days, they were often my competition for top tier advisors. 

How did it all go wrong?

Time and so much else had changed since. (in no particular order)

Lesson No 1: Resting on your laurels is a precipice for disaster. 

As early as 2004, although RW has been recruiting advisors on a consistent but sporadic basis: the evolving competitive brokerage market already put pressures on a brokerage firm with a very casual laissez faire culture. They may have been exclusive, but they were no longer the sole dominant brand. Other brands were fast emerging. Among them, Wellington West. 

Consider this: Founded in 1857, (Older than the original telephone!) Richardson Wealth had been around for some 168 years with a total of 40B AUM. 

In contrast, founded in 2017, Wellington Altus is only 8 years old. They have amassed 40B. 

You know the old saying: ‘If you’re not growing, your shrinking’

That’s when you KNOW something’s very wrong!

The very transparent lack of recruitment growth is both a cosmetic and existential disaster. 

For a multitude of reasons, the lack of advisor growth at RW affected both the health of its retained earnings and its subsequent ability to allocate growth capital on their own devices. This long-term occurrence affected both advisor growth and shareholder value. One determines the other. 

This became a chicken and egg quagmire. To improve AUM, the firm had to use its own capital for advisor recruitment, thereby affecting shareholder earnings. Over time, this created much internal resentment for shareholder dividends and any liquidity for advisor exit/retirements. 

The inability – reluctance to fund continuous advisor growth together with poor shareholder value, was one of the main sources of advisor frustration at the firm. This was publicly known for a long time: It became a major repellant for any advisor looking to make a transition. 

If you were working at RW, that would be very difficult to overcome. 

Advisors don’t like change.

Having spoken with many Portfolio Managers the last couple of years, the back – office change to Fidelity was a major irritant and source of dissatisfaction for many RW brokers. That alone would not have been a dealbreaker. But in conjunction with the larger issues, it is the pile up of woes that was enough to break the camel’s back. Many advisors soon left after the Fidelity switch. On top of everything else, they had enough. 

No Confidence in Leadership.

For more than ten years, RW Executive had been playing a double game with advisors and the investor market: Again, it was no secret. It was widely known they were looking to unload the firm while at the same time, assuring both existing advisors and the investor public that they were committed to the ‘long term future’ of the business. Nothing could be further from the truth. The mixed messages signalled poor vision and lack of trust. 

Over the years, several ‘transactions’ were ‘imminent’ and then fell through due to retention bonuses or other issues. These fall offs became public rumour mills that were accepted as common knowledge. They assumed a life of its own. 

These events only reinforced the general lack of trust in R W leadership. This in turn affected external recruitment. It became a vicious cycle: After all, what advisor would ever consider moving to a firm long rumoured to be for sale. Another ‘myth’ hard to dispel. Add this to the existing line up of pre-existing woes – and that adds up to something called plenty. Plenty of baggage I don’t need!

Beware of advertising!

Through RW’s ongoing struggles with advisor recruitment, back-office issues, shareholding. growth capital: the firm embarked on an ad campaign to show “injections of growth capital” to attract advisors and the switch to Fidelity Clearing to demonstrate state of art back office technology systems.

Unlike other broker dealers recruiting advisors to scale the business, RW’s public attempts at advisor recruitment was a last-ditch move to drive major advisor recruitment to the firm in the hopes of creating quick asset growth and further shareholder value. 

Since advisors had already started their exit, it was also done to avoid any further mass advisor exit, to avoid imminent doom. 

By this late stage, it was too little too late. 

Advisors are well read individuals. And the street is small. 

Although the firm had a pristine reputation; years of minimal growth and occasional advisor hires only confirmed the notion that this public relations campaign was more of an existential drive for sheer survival.

News press of Richardson’s very litigation with early shareholders (2021) only showed that early advisors who wanted to exit, now realized the firm had a revised shareholding agreement. This resulted in two things: original equity partners could not exercise their original liquidity as they hoped/believed. But even more important, new advisors considering their transition options, could not trust a firm that was being sued by its own former employees. That was a major turning point in the firm’s decline. 

While the firm reached an out of court settlement, the damage was already done. The trust and confidence was irrevocably broken. Any further attempts at advisor recruitment became a near Houdini futile escape. 

Since Richardson was a public co, its share price was well known. And what stood out was the fact the share price had not appreciated in over 10 years. That’s a poor performing stock. This was a self-made calamity.

Like any other declining stock, the reasoning is very simple: as I always tell advisors-portfolio managers. If the share price of any public company has not appreciated over any reasonable period, why would you a) buy it and b) why would you ever consider working for it. Neither premiss made sense. 

RW was a perfect example of a firm trapped in so many troubles, that it was a titanic ship about to sink. Only a sale would save it from eventual collapse. An even greater embarrassment. 

Besieged with lack of long-term shareholder value, no confidence in leadership, poor asset growth and notable advisor exits – these factors all contributed to a firm that suffered death by a thousand cuts. 

For many, the fact that such an esteemed firm like RW agreed to be sold to IA Private Wealth, is widely perceived as a real downgrade and betrayal of a once untouchable legendary brand. It only reflects the true lack of options they had. Their own dire situation was the cause of this rather shocking result. 

Like every broker dealer, every advisor hire is a major cosmetic win. Every advisor exit is a major cosmetic loss.

Compared with other growing dealers, RW had very few hires and very notable advisor exists. The advisors who left had significant AUM. That in itself was another major public relations disaster. The more whom left, only resulted in yet more questions, suspicion and general non confidence in the firm overall. 

Even though Richardson Wealth will preserve its name under the transaction, the ownership change is known and must be disclosed to clients. How long the brand will be preserved remains another big question. Standard M&A practice normally dictates that the brand often changes over time. 

For any advisors-portfolio managers now having to spin the new transition, ie; asking the clients to move from an esteemed legacy brand to a relative unknown brand in the investor marker: that dubious narrative may be the biggest gamble of their professional career.

Last, Richardson Wealth wasn’t the only legacy firm to suffer this fate. 

The legendary 3 Macs (aka, MacDougall MacDougall MacTier) was another crusty but well respected venerable independent. 

After some 177 years in business, the firm amassed a paltry 6B AUM spread among 70 brokers. Not much to show for being in business almost two centuries. In 2016, they got sold to Raymond James Limited. 

Although the reasons for the sale of 3 Macs were very different from Richardson, 3 Macs lacked the discipline and desire to reinvest profits to retained earnings. 

The net result was the inability to fund advisors with signing bonuses.

Leaving minimal to no retained earnings simply means the firm will never grow due to insufficient growth capital. It’s that plain and simple. 

This is not about the right of Executive – Shareholders alike to withdraw the dividends they choose. But lack of fiscal discipline carries grave consequences. It will often necessitate the accelerated sale of the business. 

Conclusion.

The sale of any firm to another well-respected brand (of like quality) is not just good public relations. Nor is it the preservation of owner pride and reputation: It is every bit about the smooth advisor transition being consistent with its long rich past. 

A well-respected firm will often seek out a buyer with similar heritage and brand/reputation. This common reputational alignment is critical to the successful asset retention and sanctity of the transaction. 

The very caliber of firm you sell to will ultimately determine the success of its outcome. 

How you run a business together with firm fiscal discipline will always determine the end story. And not every story has a happy ending!

My take: Doubling your share value doesn’t begin to compensate for the end of a 168-year-old wealth management brand. Like the Bay / Eatons, it’s a sad ending for another great legacy. 

Mark Toren
President & CEO
Toren & Associates

Mergers & Acquisitions are often the result of both successful and struggling companies needing to sell or merge – to survive and compete in an ever-saturated investor marketplace. 

While we have witnessed some recent successful ventures; we are going to witness evermore buyouts for a more tragic reason. Here’s why:

We can often divide firms into two classifications. Companies that are ‘incorporated’, often referred to as micro businesses or cottage businesses.

The other, are real businesses. Firms that have accumulated profits and allocated growth capital to build a firm, ie, transitioning from a micro company to a real professional business. That is not just the result of business skill and acumen but the ability to exercise strong firm fiscal discipline to grow a company into a real business based on exponential growth. This fiscal discipline is an art in itself. 

Like waiting for an early company with immense potential but too early to purchase, it requires the patience and intestinal fortitude to ride the full journey. And very often, the road is long and arduous. 

In my experience, I have seen many successful business owners and many less so.

We often associate smart investment acumen with strong business intelligence. Unfortunately, this is not the case. They are the perfect combination in any business- but they are not mutually exclusive. Ie, they can happen together but it is not necessarily so. 

The Canadian wealth manager scene is filled with a plethora of small, medium and large size firms. They range anywhere from 50M to the hundreds of billions. 

What separates a 1-2B AUM firm from a firm with only 50-200M in AUM?

Two critical ingredients. 

1. The ability to amass/possess capital within retained earnings for business growth. 
2. The single desire and focus to grow a business, sacrificing one’s own personal temporary needs-lifestyle, in order to accomplish this single objective. 

We see a number of small micro boutiques (40-300M) who have been in operation for many years but have flatlined. Not due to poor investment performance but the inability to invest capital to grow a business

Very often, seasoned investment managers with no personal history of sales or marketing, come from a very different place: Deriving from an insurance or mutual fund co background, they tend to assume their old (previous employer) or current “track record” will carry them through the day. That is most often not the case. 

While the ‘Investment Manager’s past performance with Insurance companies – mutual fund companies are inextricably tied with the brand, that is not the case with Private Wealth Managers. 

The majority of Private Wealth firms don’t have the same end user client: whereas Advisors are far more tied to brand, individual HNW investors are not. They are not buying mass market funds but individual portfolios or model pools of the firm itself. As such, the past performance of a former Investment Manager at Mutual Fund Co X now turned Portfolio Manager at ‘Y Private Wealth’ is irrelevant. 

That Portfolio manager must now recreate his/her own brand and start a new track record for their strategy/portfolio. This task takes time, money and a whole lot of intestinal fortitude. A skill few portfolio Manager-Business Owners are equipped with. Very often this is a 3–5-year horizon at the bare minimum.

Many Portfolio Managers from the older generation live on the old notion that a silent, unseen HNW market will be aware of this individual and their evolving track record in progress. There is simply is no one out there to create and build the new narrative to a competing investor market. That is the big deficiency gap. 

I call these owner-portfolio managers of these small boutiques the ‘Willy Lomans’ of the industry. They are small barely viable companies hanging on. 

Willy couldn’t build his business for one of two reasons: 

1. Because the owner couldn’t deploy enough capital aside to hire his/her Chief Sales Officer. This individual is equally important as the investment management process itself: An investment strategy without a narrative is irrelevant and a narrative without an investment strategy is equally irrelevant. In essence, both are sufficiently required to operate. One without the other is a failed recipe.

2. The Owner-Portfolio Manager doesn’t view the Sales function as an inherently equally valuable function in order for the wealth manager to grow. This often stems out of pure intellectual superiority. One could also call this a form of snobbery! These business owners often feel they can operate without the existence of such function or the sales function must be subordinate to the Investment Management function. This is both false and ultimately self-destructive. 

Having observed the common action-behaviours of many wealth managers over the years, a few common themes stand out like a sore thumb:

1. Many boutique owner-managers have a deficient, biased view of sales professionals. Their own mindset becomes the biggest hindrance to business growth.
2. Since many of these Owner-CIO’s don’t have the same entrepreneurial bent as individuals coming from a Sales-Client Services background; they are more risk averse to allocating risk or growth capital to the sales function. This is evermore true when these owner – portfolio managers come from an insurance-mutual fund background, where the sales team was separate from the investment process, there was little to no direct contact and the sales function was a firm expense, not their own.
3. Investment Managers often suffer from limited understanding and value of the sales function. They often live in a siloed world of strategies, portfolios, buy & sell positions and theories. They are important. But, separated from a well constructive narrative with history, context and value add propositions, this becomes irrelevant. When a firm is reduced to pure numbers, it then becomes hard to separate it from its peers. A strong narrative is often the critical distinction that resonates with investors. This is ever so critical with an overabundance of wealth managers to choose from.
4. Whether Value, Growth or any other investment style; Investment Manager-Owners often have sharp investment acumen to spot great companies that generate strong returns over time. That skill requires much patience and fortitude. But they often don’t extend the same courtesy and patience to sales professionals whom require the same skills of time and patience to find  and build the narrative, preaching to a competitive investor market.

Many Owner-Investment Managers have great investment acumen to select great companies. They do so by identifying and measuring the key criterion that makes up strong sound businesses. 

But the same owners are often blind to looking at those fundamental criterion-and applying those investment fundamentals to their very own business. 

Because whether public or private in kind, many of those basic criteria are the same. And it is the rigid commitment to growing a business that makes a company attractive to investors alike. And that means client investors and owners of wealth managers themselves. 

Owners of these mini boutiques often wonder why they are not getting the healthy multiples they often see in these public transactions? Its rather a silly question. 

The answer is stupidly simple: the steadfast refusal to adhere to the very basic fundamentals of any sound business, makes you nothing more than a distressed business. And the market will dictate whether it is attractive for sale and at what price. 

The importance of Investment acumen should never be mistaken with business savvy. A strong business owner must have both to pay it forward. 

Mark Toren

President & CEO

Toren & Associates

The Burgundy Asset Management Ltd. transaction was no surprise. It was long rumoured ‘on the market’ for several years.

While it is natural for owners to prepare their liquidity exits; this strategy needs to be balanced with what is truly in the client’s best interests.

The very original foundational premiss of many firms (being ‘independent’, ‘non – aligned’ and ‘proprietary free’) lies in obvious stark contradiction to the premiss of the new bank narrative. One asks the question: Does this serve the interests of portfolio managers or their clients?

Burgundy Asset Management epitomized two holy characteristics: a) the stubborn necessity of strict business and investment independence and b) the steadfast commitment to its own pure investment conviction. Nobody illustrated this better than Burgundy. Its brand was built on this powerful, sacrosanct mantra. Indeed, it was THE reason for its attraction for both client- investors and portfolio managers alike!

While they were infamous for what they stood for, they were equally noted for what they stood against. They were notorious for their toxic aversion to product manufacturing, funds, commission-based selling, product cross selling – everything the bank epitomizes. So what now?

While some of Burgundy’s Portfolio Managers will now be receiving their retention payments – both portfolio managers and their clients should be asking themselves: What is my real appetite to join a bank, when I have been a loyal supporter of my independent wealth manager for 35 years? After all, that is why I (client investor) was attracted to and remained with the firm.

We understand the difference between core manager ‘conviction’ and momentum investing. So what does the ‘Day After’ really look like for acquired firms just like Burgundy:

1. The preservation of the employee’s current compensation for a limited, fixed period. Normally only 12-24 months at best. This will revert to a Bank based formula (the bank needs to recoup money it paid out for the firm!)
2. The pressure to introduce and sell bank investments
3. The pressure to sell/cross sell bank loans, CC’s, credit lines, mortgages, etc, etc.
4. The inevitable loss of firm’s autonomy and investment independence.
5. The steady increase in management fees.
6. The preservation of the brand is not assured.
   These are the typical common results for all employees, most notably – Portfolio Managers and their client-investors.

In fact, in almost every case of a bank acquisition, (except for brand preservation), the first five of the above six criterion were the inevitable results of the acquisition of wealth management firms in Canada. They literally go hand in hand.

They remain the most common reasons why Portfolio Managers exit the banks in favour of independents today.

The sudden changing narrative occurring amidst a shareholders liquidity exit may raise many questions for client-investors, as to exactly where their own best interests lie.

The asset retention function has significant consequences for the economic value of the liquidity exit-for both owner/shareholders and portfolio managers. While the ‘holdback’ is perfectly standard in M&A, the very public mention of this clause is a subtle warning: meet the hurdle or else you don’t get the full pop. (Remaining 20%)

It becomes critical that clients are now being asked to ‘love the bank’ for shareholders to realize their full value. What may be good for bank shareholders is not necessarily the same for Burgundy’s client-investors.

Indeed, private clients-investors can hold bank stock with any private wealth manager without being clients of the bank! One has nothing to do with the other.

Let’s dispel the notion the firm lacked choice of buyers. This firm was anything but a distressed company needing a buyout! As far as brand prestige and reputation goes, they sat at the very top.

Banks are hardly the only option for sellers. The M&A business has become a North American playground. Banks are fiercely competing against a swarm of other major institutional buyers.

In today’s competitively desperate market for wealth managers, there are a plethora of buyers. Ranging from asset managers, asset conglomerators, insurance companies, VC and Private Equity firms: not only are there a multitude of options but many offer far more flexibility and autonomy than traditional banks, epitomizing stringent protocol across the board.

The task of convincing the client to embark on their ‘new journey’ may indeed pose the biggest challenge for the Portfolio Manager, now preparing to provide a whole new spin, to secure client – asset retention and preserve shareholder value.

That is precisely the risk he/she is now assuming before engaging with the bank.

This paradigm change not only has repercussions for the client: but the very contradictory narrative puts the portfolio manager in an awkward bind: His / Her ability to tap dance around this glaring contradiction, may have severe implications for the portfolio manager’s ability to transition their own clients.

After all, their name is aligned with the firm they now represent.

This could be a transition the Portfolio Manager might not be prepared for.

Mark Toren
President & CEO
Toren & Associates

The offer of signing bonuses is often the most tempting form of inducement for a wealth advisor. But they have also become very confusing and deceptive.

Many broker dealers still provide a traditional offer containing two elements. They offer fair market value for his practice. In addition, a traditional transaction offers the advisor the ability to choose the advisor who will be his successor upon retirement. The dealer recognizes the advisor as the rightful owner of his practice and sole decision maker regarding the transition – inheritance of that practice.

Every buyer has motives. But those motives are not all the same. Here are three reasons why the Investment Advisor-Portfolio Manager should be very wary about what they are:

A) An increasing number of broker dealers are offering attractive signing bonuses because they are purchasing the book for the firm itself, ie, it will be the owners property of the firm not – another advisor. In effect, the advisor loses the right to choose his successor.

First, the reason the firm is willing to pay up for the advisor’s practice, is because by assuming ownership and control of the client portfolio, the profit margins are far different. By owning the book, they can have a Salaried based advisor. This instantly eliminates commission-based revenues. A game changer for profit margins.

Second, the firm also de-risks the possibility of client exit, since the client relationship is now with the firm’s advisor rather than an ‘independent’ advisor. Very often the book will be sold back to one of the firm’s owners, reducing the possibility of an independent successor-advisor leaving (with the practice).

B) Another major conflict is the fact many broker dealers are not only distributors but product manufacturers.

First, by purchasing advisor books for the firm, the firm now have control over the construction of those portfolios and exactly what product can go into a client’s portfolio: ie, the dealer can now put the client into proprietary product. This again changes the economic equation as the dealer now makes a profit on the product itself while also earning a ‘management fee’ managing the portfolio. Another classic conflict of interest. Most clients are not familiar with this.

While this is all perfectly legal, it represents an obvious conflict of interest for the advisor and his client. Proprietary product always puts the advisor in the spotlight. Is he really representing the client’s best interest when a) he’s selling proprietary product vs the best available product on the market and b) why should he earning commissions on both ends.

Second, once the advisor has retired, the dealer will often convert the client portfolio into a proprietary product-based portfolio. A portfolio that is often very different from its original form. This becomes the classic misalignment of the client interests versus those of the dealer.

In many cases, the new portfolio does not resemble the one which the original advisor had specifically structured for the client and managed accordingly. How does this serve the client’s best interests? The advisor needs to ask himself; “Is the new firm really looking out for my client’s interest or is it trying to maximize its own distribution revenues through product manufacturing?”

We have a litany of examples of banks and large asset managers (being big product manufacturers) putting tremendous pressures on investment advisors to buy internal product: not for the client’s best interest-but because the asset manager needs to remain a separate, profitable revenue entity. It is often the very reason why banks asset managers buy small boutiques and Independent Advisors: Precisely because they become a significant additional distribution channel for the asset manager. In most cases, small or large asset managers who carry proprietary product are mere replicating what banks already do. They are no different from the bank. And with an ever-increasing number of independent dealers becoming product manufacturers, they now behave in the same fashion. It becomes impossible to differentiate them from the bank.

Last, by selling his practice directly to the firm vs the individual advisor, advisors are essentially disenfranchising themselves (and their fellow colleagues) by bypassing the free market system. He is eliminating the free market practice of selling the advisor practice between/among investment advisors. In effect, he is contributing to the demise of advisor-based ownership, to one where dealers now become the warehouses of client accounts. They own the client-assets.

While this change of ownership is an economic game changer for the dealer, the transfer of client assets does not necessarily serve the client’s best interest. The two are often not aligned.

This poses the ultimate contradiction: The Investment advisor is often viewed as an entrepreneurial centerpiece, the bastion of independence and self-ownership. The very practice of bypassing fellow advisors and selling the practice itself to a firm (vs the advisor himself) is perceived as the ultimate betrayal and contradiction of his own identity, ie-everything he was and represents.

Warning to the Advisor!

Not all broker dealers are equal, and neither are the assets they hold.

For many investment advisors, whether he is simply making a transition or looking for a retirement exit; getting the best deal on the market is a fair, reasonable goal. But that doesn’t mean he has to sell it to a firm. Nor is the firm’s offer in the client’s best interests.

The Advisor is perfectly able to have his cake and eat it too.

With a plethora of dealers hunting for fee – based advisors, he is able to make choices that not only benefit him-but those of his clients too.

The best way to ensure the client will have smooth continuity of his managed portfolio – is by effectively managing this transition to an advisor who best reflects his own investment style.

In order to best facilitate this, it is imperative that he maintains the free agency market, by making an advisor-to-advisor transaction rather than advisor to firm.

This highlights the underlying paradigm shift he must now avoid. When he’s ready to make the transition, it best preserves the character and sanctity of the advisor-client relationship.

Over the last 15 years, many investment advisors have been too embroiled with volatile markets and worrying clients to get an accurate glimpse of industry changes.

One of the reasons why many advisors are uneducated about member firms, is because there is an entirely different class of investment firm that is not the broker dealer. It is the modern – day discretionary money manager. This institution has become the fastest rising phenom to grab the headlines in the Canadian wealth management scene.

The purpose of this article is not to make value judgments; what is good/bad, better or worse. But simply to highlight some of the unique, compelling advantages that Independent discretionary money managers hold over brokerage firms. Let’s explore!

To be clear, a discretionary money management firm is only suitable for an advisor under the following conditions:

1.The Individual is currently a registered Portfolio Manager or Associate Portfolio Manager (aka, Advising Rep or Associate Advising Rep) with a current CIRO or OSC / AMF registration)

2.The individual is in process of / or in the final stages of being registered as a Portfolio Manager or an Associate Portfolio Manager. In this case, the individual must satisfy the following conditions:

In either of the above cases, the individual must hold a valid CFA Charterholder or CIM designation, or be in the final stages of obtaining either designation in order to be registerable. No other condition will suffice.

In general, a wealth advisor who is or wishes to become a Portfolio Manager because of their fundamental belief in managing clients on a discretionary basis, (without product or commission – based fees), would make a good fit for a discretionary manager. The main condition being there is a clear investment philosophical alignment between the candidate and the wealth manager. This is paramount.

Last, the Advisor or Portfolio Manager must hold ALL their clients in discretionary accounts. There is no mix. A true Investment Counselling firm manages discretionary portfolios only. Anything else falls outside of their core beliefs. It runs against their very core being. In such cases, the advisor/portfolio manager would be far better suited with a brokerage platform.

The power of Variety and Choice

In just 15 years, we have witnessed an explosion of independent money managers across Canada in unparalleled numbers.

Here are some of the main reasons why advisors are exiting larger bank broker dealers for small independent discretionary managers.

Unlike many brokerage firms (with less profitable and reliable revenues), discretionary managers operate on stable recurring revenue models with set fees on a quarterly basis based on current AUM. From a firm and advisor perspective, this makes the business model far more reliable and economically attractive for owners and employees alike. Commission – based trading is out.

Discretionary management firms provide revenue stability and predictability. In sum, specifically HNW money managers enjoy the best margins in the investment industry today. Nothing competes with it. Its growth outstrips every other firm type.

For a wealth advisor looking to make a transition, unlike the traditional brokerage industry that has an ever-declining number of dealer members, there is an abundance of money managers across Canada covering every asset class and investment style. He is literally littered with choices.

To illustrate how popular they are, consider this: In 2009, there were approximately 100 money managers in Canada. Today, that number sits at well over 320 – and growing. That is a 300% increase in under 15 years. This reflects the growing trend of advisors leaving the traditional brokerage platform in favour of independent based money managers. The numbers simply confirm the narrative.

In fact, the ever- increasing perception among advisors that the five main banks are essentially the same bottle of wine with little distinction, confirms why they are moving to other independent money managers/broker dealers than they are competing banks. In the advisor recruitment world, it is the independent firms who are becoming the net winners.

In sum, the fact that there is greater diversity / variety of independent Canadian wealth managers as opposed to the same five chartered banks offering identical products, gives advisors the power to choose an investment platform that provides advisors with comfort and philosophical alignment. It also allows the advisor to make better choices because the firm is more aligned with his client’s best interests.

Margins

Unlike traditional trading/transactional business (which has steadily declined over the last 15 years), one of the biggest advantages of the discretionary business model is the profitability and long term sustainability of management fees. It is a revenue recurring cash cow.

Whether an asset manager is running model portfolios or/and pools, the margins on private client business are highly profitable. This enables the firm to achieve faster growth and scale than ever before. It also explains why private discretionary firms are growing whereas many broker dealer firms have remained stagnant. The sheer industrialization of model portfolios have allowed small to mid – sized wealth managers to achieve growth through new, sustainable recurring revenues, without incurring bank like infrastructure costs associated with it.

From a recruitment perspective, ongoing recurring income is an incredibly attractive benefit to operating within an independent discretionary environment. In addition, because of the fast growth rates, there have been far more acquisitions of money managers than their broker dealer counterparts.

In sum, both the stability of recurring revenues together with equity ownership in a fast – growing manager, make the Portfolio Manager the ultimate individual of capital with true liquidity.

Advisor freedom & flexibility

An independent wealth manager offers the wealth advisor significant advantages: flexibility with respect to sales & marketing, wide open territorial coverage, access to vertical markets, US market access, a more versatile approach to compliance and in some cases, real participation in the investment committee.

In contrast with the bank brokerage environment, although the brokerage advisor has significant flexibility with regards to sales & business development, he is also competing with 800-2,000 of his fellow advisors (in the same dealer!) who are after the same target market. Indeed, his fellow ‘colleagues’ are his own biggest competitors. A true organizational internal conflict.

No Asset Hurdles for Portfolio Manager Registration.

In every bank full – service brokerage, an individual advisor must reach between 60- 70M in Assets Under Management before the Bank will apply to have him/her registered as a Portfolio Manager. It is purely designed to get the advisor to ramp up their business to a certain asset hurdle before they become eligible. This can often take 5-10 years.

At an independent private wealth firm, Portfolio Manager registration is not tied to assets. So long as the individual has the required designation and relevant work experience, he/she can be registered. This is so attractive for many advisors who are in the process of building their own practice (typically 40-60M. Indeed, these individuals would not be able to be portfolio managers in any bank brokerage at that asset level. But they can be immediately registered at a private one, providing they meet the regulatory requirements. Even at 30M, most money managers will have you registered as a Portfolio Manager. (so long as you hold either a CFA or CIM)

The ‘Private Club’ experience

In many ways, an independent, private wealth manager has the look and feel of a private club. Any discretionary firm is made up of a small collection of individuals whom sharen a similar philosophical style and commonly subscribe to a specific investment philosophy. It is a club of common rules and beliefs that bind a group of individuals together.

As opposed to pure quantity of assets the wealth advisor holds, it is the substance of the advisor’s own investment beliefs that will determine whether there is a true fit and alignment with the firm.

As opposed to a brokerage firm that operates much like a potpourri of individuals who think and act in very different ways: There is no value judgment to be made here. Simply a statement of empirical fact. Each advisor runs their own practice as they wish. Other than the pure raising of assets, a broker dealer has no common investment purpose or uniformity of thought.

One by-product of being part of a private wealth manager is the look and feel of intellectual upgrade and general functional – intellectual equality among existing members. Whether the Portfolio Manager holds his/her CIM or CFA makes no difference. Both equally get the wealth advisor to where he/she needs to go. He/She becomes a Portfolio Manager.

In the client facing world, a Portfolio Manager holding his CFA or CIM carry equal functional weight. One has no greater value than the other. For advisors yearning to become a Portfolio Manager in today’s world, it takes longer to obtain a driver’s license than it does a CIM (8-12 months).

Indeed, with a chronic shortage of Portfolio Managers with an insanely competitive demand for these individuals, the regulators have never made it so easy with the CIM designation as the clearest, quickest route to get there. It really is that simple!

For an advisor looking to be a part of a collective with common thoughts and beliefs, he/she may find a closer bond between like – minded individuals. As a result, they may feel a common purpose working towards a similar investment objective. This means that cooperation and collegiality are far more common in independent discretionary managers than they are in a traditional brokerage dealer.

In a club of like – minded members, these criteria are essential to both membership and growth.

The Elite Club of Investment Intellectuals

Another big reason why advisors are particularly attracted to Investment Counselling firms, is for their investment management focus and the widely held perception that they are an asset manager first, rather than a sales & marketing oriented business.

One advantage is the opportunity to be a part of an intellectual club of like- minded thinkers who share similar thoughts – investment ideas and can jointly cooperate to add, change and improve the investment management part, or any other part of the business. The focus is on the group as a whole rather than just one advisor working alone.

One for All and All for One

Wealth managers often operate as a club where its participating, producing members get to share in the ongoing spoils of new client-assets coming in. So long as the said Portfolio Manager is a contributing member, he/she can expect to receive ongoing house referrals. This is the case with most wealth managers. It is a huge added benefit that helps grow the Portfolio Manager’s book of business. This simply does not occur in a regular broker dealer.

Finally, since investment counselling firms all run on an OSC platform by definition (versus the Brokerage-CIRO platform), there has been a long- standing prejudice and preference that investment counselling firms are considered true, pure money managers. The reason for this is simple: true IC firms cannot charge a spread on trading fees, whereas CIRO based brokerage/money managers can and do. Unlike CIRO money managers that earn a spread on trading fees, this further separate IC firms as being a pure discretionary platform that makes no commissions on any trading. While the investor client would not know the distinction, for an increasing number of discretionary advisors, it is becoming philosophically aligned with their own values.

This positions the IC firm as a purist money manager free from conflicts of interests. Ie, how can a PM be a discretionary manager when he/she charges trading fees like a traditional broker? The perception of this inherent ‘conflict’ is always there.

Investment Management vs Sales Focus

Many of the older, traditional wealth managers emanated from true investment managers and their growth originally derived from performance, word of mouth, reputation and referrals. This all stopped 15 years ago.

Due to the mechanization of research and analysis and the institution of model portfolios, an ever – increasing number of private wealth firms are well oiled sales & marketing machines, with strong emphasis on sales & business development. The majority of firms have created a division of labour. There is a clear functional separation between Sales & Client service e- oriented Portfolio Managers versus true Investment Management focused Portfolio Managers. Although they are intertwined and interdependent on each other, they carry an entirely different function.

To be clear, they both carry exactly the same registration as a Portfolio Manager-but they have very different functions. In either case, the advisor must be registered as an Portfolio Manager to carry out either function.

Recognizing that many individuals need meaningful participation-involvement in the investment management process: so long as the portfolio manager is a revenue contributing member of the club, an increasing number of private wealth firms are giving client facing PM’s the ability to participate in idea generation, stock selection asset class suggestions (within very firm guidelines). The caveat is the principle understanding that the final arbiter of all investment related decisions rest with the investment management committee and its CIO. Sometimes the investment committee is made up of client facing portfolio managers. But more often, it is made up of an entirely distinct group of investment professionals.

Philosophical disagreements are not common. The vast majority of client facing PM’s are already in full alignment with this process, otherwise they would not have signed up with the club in the first place. It is one of the principle reasons why they joined.

Further, from a client-investor perspective, the fact that many private wealth firms have cleverly evolved as more investment focused, ie, a ‘wealth management boutique’, ‘family office’ or multi ‘family office’, has allowed them to be far removed from the age – old perception of a simply being ‘sales chop shop’ but far more client – investor centric.

With more private wealth firms focusing on deep financial-tax planning, trust & estate, insurance and investment counselling; they have demonstrated the ability to offer an integrated wealth management solution with aligned purpose. This has become another attractive feature for many upcoming wealth advisors and their HNW clients. Very often, a firm already has individuals performing various specialized functions to serve as a central shared resource to portfolio managers. Indeed, the recent litany of bank proprietary conflicts and sales pressures on various divisions of the bank, all serve to paint the bank brokerages as massive sales machines with little regard for investors. This only further separates independent private wealth firms with their ability to show how far apart they are in structure and substance.

Again, the sheer growth of private wealth firms is further proof that increasing numbers of investors are resonating with independent firms as a better way. This also increases advisor confidence in his/her ability to move their clients to a preferred fiduciary. What resonates with investors is always in the advisor’s best interest.

Contrasting success for the Brokerage Advisor vs the Private Wealth Investment Counsellor

Whether in a bank or independent firm: in the brokerage environment, an advisor is responsible for the entire litany of functional responsibilities. This includes sales, marketing, business development, administrative and some compliance work. For any advisor starting out or in the middle of building out his practice, it is an overwhelming task for the best individuals. And only when he/she reaches a revenue hurdle of around 750K will they get HALF an associate. The rest must be subsidized by the advisor themselves. This remains a burden many young advisors cannot overcome.

By contrast, most private wealth firms provide two significant advantages not offered for young-upcoming wealth advisors in the brokerage environment.

1.The investment management structure is run entirely separately and exclusively by professional investment managers responsible for research-analysis, stock selection and portfolio construction. This relieves the client – based Portfolio Manager of this significant responsibility.

2. All administration-operational support (and costs) are provided by the firm’s own staff. They are the shared resources available to all its portfolio managers

3. By not having principal involvement in constructing investment products portfolios nor involvement in administrative-compliance procedures, this relieves the advisor of a massive burden. This gives them time & space to invest in building his/her business. As a result, this substantially increases the odds of advisor success.(building a successful practice).

For advisors in traditional broker dealers, the leading cause of advisor failure is the distraction of managing the entire sales, marketing, investment function, administration and compliance responsibilities. It is simply overwhelming. It impedes their time and ability to do the important things that matter most. It robs them of the ability to exercise their natural skill in unlimited fashion.

For many years, the private wealth industry observed the systemic shortcomings in the brokerage environment, its failures and adapted: For the Portfolio Manager in a private wealth firm, it’s a major distraction removed. The odds of his success have increased many times over.

Where’s the proof that this structural separation works?

Very simple. Look at the 320 private wealth member firms that have already figured it out. They are the current and future source of industry growth. The numbers reflect the fact that the model works. And these are the firms that many discretionary advisors are now moving to. It embodies the old saying, ‘if you can’t beat em, join
em.”

Does a Private Wealth firm really offer flexibility to its Portfolio Manager?

Obviously, the answer depends on the individual firm. While some firms are very firm on their core philosophy with often blinding conviction – many independent private wealth boutiques also offer a significant measure of strategic and investment latitude to producing advisors. This means 2 things.

1) Depending on the advisor, the ability to have significant input in the investment structure (if the individual has substantial investment experience to warrant)

2) Significant authority to help steer, change and modify the strategic direction of the firm, if necessary, by general agreement. Normally, he would have to be a partner.

The size and nimble nature of private wealth boutiques allow for easier change in so many ways. This includes moving from a core manager structure to a multi – family office, multi asset class, alternative focus or an integrated wealth management offering. All these structures take considerable time to build out and perfect. But the decision to make strategic-structural changes are far easily done in contrast with large bureaucratic bank like organizations.

In sum, while members of the club originally come together because they hold a set of shared values and investment philosophies; this does not mean that individuals cannot make suggestions for change. Whether they be investment or strategic issues, most firms hold its members with equal regard. In this respect, it remains another major reason that drives advisors to smaller firms.

It should be made clear. There is a difference between being a club member and member of the Executive Committee: (normally reserved for partner-shareholders) It is no different from any other private club: a private wealth firm has a formal set of rules, policies and clear protocol for how it governs itself and business conduct.

Like any club membership rules, decisions must be made by majority or unanimous consensus of committee members. Obviously, like any other professional services business, the extent of a Portfolio Manager’s own involvement and influence, depends directly on the size of his economic contribution to the firm and whether he is a shareholder. The former usually results in the latter.

By the Numbers

Private wealth firms have the fastest growth rate compared to their brokerage counterparts. While broker dealer firms have declined (in number of member firms), private wealth firms have enjoyed a 300% increase over the last 14 years. They are the fastest growth segment in the investment industry.

From an employee, client and investor perspective: Private Wealth managers have become the most sought – after businesses to work for and buy.

Private Wealth Managers are compelling to advisors for offering highly attractive, nimble compensation plans which include income stability, ongoing recurring revenues, and the high probability for ownership and real liquidity (for strong producers-performers) buy outs from a litany of external bidders.

HNW client-Investors have become increasingly attracted to private wealth shops for their independence, open architecture platforms and often product free biases. The sharp increase of many new private wealth firms is factual confirmation of where both advisors are moving to and the reason why clients are following them.

In the last 10 years, we have seen Institutional investors view the discretionary private wealth market as one of the most attractive long – term investments. And more private wealth firms are being sold at attractive prices. Whereas more broker dealers are simply merging to survive or closing shop. A private wealth firm doesn’t even need to reach 1B AUM to be sold. In the last 7-8 years, the industry has witnessed many firms at or under 1B, either sold in part or whole to an array of institutional investors. Given the sheer profitability and scalability of the discretionary business model, they are ripe to be sold to a Bank, Insurance Company Asset Manager, or any number of US-Canadian Private Equity firms. In sum, owner-partners have a plethora of choices.

Private Wealth firms offers so many attractive benefits: It makes ownership so very real and significantly meaningful to his clients and to the outside investor market. We have seen the historical success of many firms selling out at the right valuation, as opposed to bank dealers. Both ownership and financial liquidity in a growing private wealth firm become very real.

The number of historical transactions over the last 4 years alone have shown that, regardless of investment style, asset class, structure or size, the vast majority of investment firm type sold in the Canadian market – are discretionary wealth managers.

Private wealth firms have long become a favourite target market for many institutional investors. And the advisor’s incentive to join and help growth the overall business simply means that the multiples/EBIDTA only increase as AUM / revenues do. It is the increase in the valuations that become so compelling to producing advisors. The fact that private wealth firms are growing over their brokerage counterparts, simply means they have become the employer of choice for wealth advisors in the Canadian wealth management market.

For the wealth advisor contemplating his next career move, his future with the right private wealth firm never looked so bright.

Signing Bonuses vs Transition Payments

As a general rule, most independent private wealth firms (discretionary) do not offer signing bonuses. They are not sufficiently capitalized for this. And firms have little to no interest in wealth advisors interested in up-front payments. They view this as a misalignment of philosophical and economic interests.

But firm owners can and will offer transition payments over the first 1-2 years to create a forgivable transition payment (expressed as a forgivable loan). More importantly, the assets-revenue the advisor brings to the firm will enable him / her to purchase equity in the new firm. There are various formulas for equity purchasing given the taxable considerations.

For many advisors, the combination of transition payments and equity shareholding make this compensation package a highly attractive buy in, over a traditional brokerage signing bonus. One is not necessarily better than the other. It is purely a subjective personal decision. The choice really depends on the individual advisor. In sum, they are simply two very different business models to attract advisors.

Why moving to an Investment Counselling firm might makes sense for many wealth advisors!

A word of caution to Wealth advisors at Broker Dealer firms.

Whether at a bank dealer or traditional brokerage firm, while signing bonuses are often a powerful compelling incentive to join a brokerage firm – It also comes with some very clear conditions attached. One must carefully heed the warnings and understand the consequences.

First, an advisor must have crystal clear conviction that his clients will follow him to his new dealer. That will form the basis of any up – front signing bonus.

Second, if the asset target/projection is not met within the said time frame, then the advisor does not receive the full value of his signing bonus. This is the risk he must carefully calculate.

Third, if he/she has not reached the agreed upon asset threshold of his conversion rate, this will greatly affect his ongoing grid payout once the time based ‘grid protection’ has expired. Typically, contract terms fall between 18-24 months. That means the advisor has 18-24 months to port his book over and receive any benefits associated with that transition. After the contract period has elapsed, other than his/her standard employment conditions-benefits, any financial terms associated with retention / bonus payments will have expired.

Finally, one major advantage with private investment counselling firms is the following: Since they do not offer traditional signing bonuses (only transition allowances), the advisor is not locked into any long- term forgivable loan. This greatly reduces the pressure he/she may feel coming to a firm with far more modest expectations. Nor is he finally penalized if the asset conversion is somewhat less than originally projected.

In the rare instance that the advisor does not work out, he/she does not have to repay any shortfall or difference as there was no upfront payment to the advisor. The terms of client-assets transition will depend on whether the advisor is either moving to a competing firm or retiring from the business.

At a time of unprecedented global social-political uncertainty, ongoing market volatility and unyielding regulatory oversight, an increasing number of broker dealers are experiencing more trouble with organic growth, operational efficiencies and shrinking margins than ever before. 

There’s no doubt that these combined factors are wreaking havoc on the best of dealers. But for start – up or post start up dealers, it has become a recipe for an impending disaster. And it is their attempts to fix these anomalies that have become worrying. In fact, they really aren’t fixes at all!

Many broker dealers are attempting to fix their underlying existential challenges by simply injecting ‘growth capital’ or ‘retention bonuses’ to stem advisors exits and attract new advisors. But as we are about to see, this is merely a band aid solution to a long – term systemic problem. 

Let’s first understand exactly what these existential problems really are and the gravity of them-before we address how some broker dealers are attempting to ‘solve’ them:

• Broker dealers who have become product manufacturers are fast losing credibility in a populist advisor-investor driven agenda for ‘agnostic platforms and non – proprietary manufacturing environments. Advisors are increasingly relishing the need to be independent of internal biases. More advisors are demanding an open architecture platform for their clients. They believe that is what makes them a true fiduciary. 

• Investors are well – aware of these conflicts. Banks remain the biggest culprits of conflicts of interests and consequently, when it comes to advisor recruitment, they are the biggest net losers to independent firms that best showcase these open architecture platforms. 

• How do we know? Very simple. Go look on the website of any independent dealer. Some 80% of advisors originated from bank dealers. That tells you everything you need to know about which dealers are losing advisors and which ones are the net beneficiaries. Ask them the reasons why they departed!

• Dealers promoting private shareholding models for long term liquidity simply fall short of the growing realities of today’s economic-market uncertainties. Given the after – effects of Covid19 together with the collage of regional conflicts, high interest / inflationary environment and social unrest – all these calamities have resulted in real economic decline and the erosion of consumer spending power. 

• Holding private shares doesn’t solve consumer inflation or rising mortgage interest rates: It doesn’t relieve the advisor of the same maladies that his fellow consumers are suffering. And Wealth Advisors are all part of consumer society. Most advisors often can’t wait for a 5 – year liquidity event. And there’s no certainty that the liquidity event will even take place when planned. The economic decline is happening now. This is especially relevant when many dealers don’t pay annual distributions! Such is the fickle nature of private shareholding!

Private shareholding models provide no economic certainty. The valuations are relative to the Owner-Authors who create them. And they always carry questionable liquidity. With many being small independents, we are not dealing with public companies! 

In comparison to cash – based compensation, Shareholding models often become an ongoing source of distraction: they always seem to fluctuate depending on time and circumstance. Rather than allowing the advisor to focus on his/her client, they become too preoccupied with their own stake in a very private, changing structure. And as most will tell you, ‘Cashing Out’ is always the problem.

The lack of real succession planning at Broker Dealer firms is a prelude to failure. It is a disaster waiting to happen. The massive void of next gen advisors to inherit existing assets spells imminent disaster. For many broker dealers, it can destroy a dealer within 12-24 months. Only the effective early implementation of a succession plan can prevent this incoming disaster and ensure the smooth future continuity of the business. 

An effective proactive plan entails hiring young advisors, with a focus on women, various ethnic groups, an effective social media campaign and building strong business partnerships. This, together with the clear willingness to implement a targeted 3 – 5 year transition timeline for a new generation of advisors to succeed: and that client – asset transition is a must – have requirement, if the new generation of Advisors are going to have any serious interest.  

For many broker dealers, the single focus on M&A activity as an easy fix to long term challenges do nothing to remedy the underlying issues. Like any other chronic disease, by the time a dealer has engaged an M&A firm to begin discussions, it is often too late. Like a cancer that has spread at the cellular level, the situation has metastasized to such a point that chances of survival are grim. 

We often find 2 equally desperate firms merging because each party needs to survive. But that probably means both firms are already suffering the same malady! 

That is why they came together in the first place. They say misery loves company. 

 But are two miserable people together really any better off? Or have they just assumed a bigger problem together?

If neither firm found a solution prior to merging, why would the new entity suddenly discover it together? In many cases, they are only delaying the inevitable. Corporate Death will quickly follow!

With several notable Canadian independent dealers, we have already seen the steady loss of advisors on a weekly basis. These are not accidents. They didn’t just happen in isolation. Due to systemic internal issues, back- office conversions, shareholding valuations and lack of real succession planning – they all spell the impending collapse or early sale of the dealer firm. Faced with these existential threats, ownership often seek external investment capital to hire new advisors and / or offer retention bonuses to prevent more advisors from leaving. ie, to prevent the impending asset collapse of the firm. If the dealer cannot a) stem the rash of existing advisor departures and b) attract new advisors, then a firehouse sale of the firm becomes inevitable. 

For most businesses, securing growth capital and retention bonuses are usually a very positive thing and the essential part of corporate growth. It forms the very function of capital raising (through equity/debt financing) to fuel company growth. Indeed, it is the foundation of capital markets. 

Why do some dealer firms publicize retention bonuses amidst advisor departures?

The reasons for why some companies raise capital are not always so apparent. And this is especially true for private companies. Once again, although a broker dealer may well put on a full court press with what they self – characterize as “massive injections” of ‘growth capital’ or ‘retention bonuses’: the real agenda behind it are often murkier. It is often a false show of bravado. And looking deeper under the microscope, we can quickly put the puzzle pieces together. 

Companies never voluntarily offer transition payments or retention bonuses without self -preservation. Unlike standard bonuses, ‘Retention Bonuses’ are usually paid out to prevent employee exits. It locks Advisors in for a contracted period. Retention bonuses are not just paid as rewards for loyalty. There are other reasons why retention bonuses are paid. And they often explain why firms offer retention bonuses in the first place. 

When we witness a steady flow of advisor departures from some broker dealers, we see a firm that has declining revenues – it is often the result of other deeper internal problems. And when we uncover what these problems are (hence the actual reasons for their exits), it reveals the real deficiencies that form a major part of why advisors are leaving. And unless those underlying problems are fixed, merely offering retention bonuses doesn’t solve anything. And they also won’t stem the tide of further advisor departures. (for the same reason) 

Any Advisor-Portfolio Manager walking into a troubled dealership won’t have his / her new set of problems resolved with a signing bonus. The Advisor is simply swapping a Loonie for Four Quarters! If anything, this is really considered danger pay for taking on such risk and the dealer’s existing set of problems. And that’s assuming that he/she even knows what they really are!

After all, an advisor can get a signing bonus anywhere. But not every dealer has serious structural problems. An advisor can easily get the benefit of one without having the baggage of the other! The Advisor-Portfolio Manager needs to ask the question: Exactly what am I really signing up for?

While capital injections / retention bonuses are often a great source of growth; they may also hide a far more sinister motive for others. And that is the attempt to put a brave mask on a problem that lurks deep in the corporate bowels of the broker dealer. While some firms may offer retention bonuses to tempt advisors to stay amidst all these unresolved troubles, the fact that an increasing number of advisors continue departing for greener pastures, reveals just how damaging these corporate wounds really are.

In many cases, dealer problems are either beyond fixing or else management simply have no intention of fixing them. The result remains the same. We have now reached a crisis of no confidence: Advisor credibility in the dealer and its leadership is gone. 

Like government ministers resigning their posts: once it has reached the stage where a trail of well – respected advisors have already left and continue leaving – It is ‘too little, too late’. The warning bells have already rung: ‘If something is essentially broken, there’s nothing to fix’. It spells the collapse of the institution: The only remedy left for the advisor, is to simply ‘Get Out’.

Getting a signing bonus is relatively easy. But looking under the hood is always the tricky part. Like the client expects from his / her own Portfolio Manager, there’s no substitute for strong due diligence on any company the Portfolio Manager chooses to hold in his portfolio. Why would it be any different for the dealer he wants to join?

If an Advisor makes the decision to undergo a successful advisor transition; it is incumbent upon him/her to invest the same time and care in themselves (as they do with their clients).

The message is clear: Beware of tempting public offers of signing / retention bonuses. Like assets, they are not all the same. 

For broker dealers already experiencing high turnover, it often signifies troubled waters within. It’s a revolving door syndrome. The waters may appear still. But what lies beneath?

In this all too familiar scenario, the advisor is simply walking into a hornet’s nest of trouble. Neither the advisor nor his client wins. And he’s sure to get stung twice: Once when he goes inside and again trying to get out!

Mark Toren

Managing Director

Toren & Associates

www.torenassociates.com

It’s tough enough for advisors to evaluate public securities and predict the market. It’s a full time endeavour for the very best investment analysts and portfolio managers. Global events and regional complexities are so unpredictable on public companies that it transcends pure knowledge and intellect. Even the best investment managers get it wrong and very often too.

Investment advisors are in the business of evaluating stocks, bonds and a multitude of alternative instruments for their clients. Much of their portfolio lies in public holdings, but many are increasingly turning to alternative assets for diversification and portfolio optimization.

But while evaluating public securities is obviously easier from an evaluation and trading perspective, private investments don’t offer the same privileges.

If an advisor understands this, then he should understand exactly what his/her choices are when looking at making a transition.

While the banks are stable, growth based public equities and bastions of dividend paying securities, they have also become the one institution that most advisors have steadily exited over the past 5 years.

Among the independent broker dealers, there are many independent boutiques (some on the verge of death, others enjoying reasonable profit margins). Some of the larger independents cater to advisors with smaller size practices while others, hold very tight, respectable asset minimums. Brand power and offerings differ among firms.

But within this group of ‘larger independents’ lie some newer post start up broker dealers. (originally self – funded to start) There are very few of them. The reason is very obvious. In contrast with a money manager, IFM or EMD, a standard broker dealer in Canada is the most expensive form of wealth management start up. It requires a substantial amount of regular and growth capital, incredible intestinal fortitude and most of all, the very quick scale of advisor growth to become even marginally profitable. Regulatory, compliance and administrative oversight is often the biggest reason for escalating costs and thin margins. Not to mention growth capital (sign bonuses). And if the firm cannot strap on 10-20 advisors within a very short time frame, it will face insurmountable hurdles. It is already well on the road to disaster.

In the last 10-15 years alone, we have already witnessed a litany of brokerage closures. Increasing burdensome oversight, regulatory costs, inadequate advisor recruitment, and no proactive advisor succession planning – have all led to the demise of many old and newer firms (that simply never got off the ground).

Several of the new mid – sized independents too fall into this category. The reason for the struggles can be attributed to poor branding, poor infrastructure, an insurance focus (as opposed to an investment centric one). Others have a different set of problems. There are a few notable start – up firms that were originally self – funded and due to quick scale of advisor recruitment with signing bonuses, required additional outside investors to fund the business growth. The newer Canadian start – ups are private in kind and will not go public themselves. The mid – term play is a liquidity exit to one of the large banks or US wealth managers.

The exact reasons for why each advisor joins these newer start – ups is not always known. And whether they really understand the reasons and exact consequences of what/how and where the liquidity event will take place is also very much in doubt.

The reason for this is unlike public securities that display more standardized behaviour through the passage of time and strict protocols, private companies don’t offer the same stability of growth trajectory or predictability. Which makes the evaluation of start – ups and any growth predictability very complex.

Because of high costs associated with a broker dealer build out, there is great pressure to ramp up and scale to satisfy outside investors, owner-partners. And showing glossy presentations of current vs future share value to potential competitive recruits, (underwritten by a respectable accounting firm) doesn’t really mean a hill of beans. And broker beware! The advisor must make a very careful calculation – he must depend on the following criterion to occur for any successful outcome. And not one of these criteria. But ALL of them must occur for a successful liquidity event.

1. That the firm will be able to attract/retain a certain number of advisors within a very specific time period.
2. That the new advisors will be able to convert their clients/assets over even in the absence of firm branding
3. That the group of new advisors (all his fellow colleagues) will be able to move their client-assets with no firm history or relevant track record.
4. That the sanctity of shareholding in this new private entity can be preserved without dilution during its incremental growth
5. The firm already has or has sufficient stand by growth capital available to accommodate the first criteria without impacting the smooth ongoing operation of the business.

These conditions are considered contingent liabilities. Meaning: IF they happen, then a result may occur. But there’s no safe or secure way to assure that these events will happen. They are all contingent on many internal and external factors for a positive outcome. The problem here is there are simply too many intangibles and many are simply beyond the control of the individual advisor.

To satisfy any single criteria is a tall order. And very few broker firms have shown the ability to satisfy all 5 necessary criteria. In general, most Canadian start up firms may check off a few criteria but not all 5. The most common reasons for failure remain the following:

1. Insufficient growth capital to fund ongoing advisor acquisition
2. Shareholding being re evaluated causing divisions, litigation and early advisor exits
3. Executive desire for an early exit against the wishes/knowledge of many other ‘partners’ to stem potential asset losses and economic disaster.
4. Insufficient capital for operation & planning divisions due to disproportionate budge allocated to advisor growth. This affects the sanctity of the overall wealth management structure.

One of the more obvious considerations an advisor must make is that if he/she joins, the success of this entire venture will depend on each and every advisor not merely moving their original book over but that that their projected future growth trajectory will also be a part of the overall economic objective. And if some or many advisors either a) don’t port over their assets and / or b) don’t grow beyond their original practice, the entire scheme dissipates. This often triggers a re-evaluation or early sale.

And for most advisors who are independent and entrepreneurial by nature, the mere idea of depending on other advisors (most of who you don’t even know and have never worked with) achieving their own asset targets for every other advisor’s eventual liquidity to materialize – contradicts why they became independent in the first instance (to not be dependent on an institution or fellow advisor for your own economic franchise). It is more often than not a Casino Rama, Blackjack gamble

This is not to say they never work. On rare occasion, it does, but once again, like the real estate seminar putting on their top 1% producing brokers on show, it is the exception not the rule. The problem is many advisors are salesman who often easily buy the sale. And in many past instances in the Canadian wealth management industry, more start up brokerages have failed than not. The odds are clearly not in their favour.

If an advisor is reluctant to buy a private security for his client (due to disproportionate risk & liquidity), then he needs to ask him/herself one big question.

Why would he work for a private firm? Indeed, he/she would be stuck with the same problems.

Advisors joining a start – up must contend with the challenge of moving his/her clients to a relatively unknown, untested entity. That is no easy feat. But to then assume additional risk by voluntarily depending on fellow advisors to meet their asset goals also means losing control. Indeed, he/she is actually giving up a certain measure of control regarding the ongoing calculation and evaluation of his/her shareholding and the viability of a final event taking place. We are no longer talking about ownership in one single business. But a part owner in a business with several hundred shareholders.

The advisor can control his/her own practice but certainly not of any other. And those are the individuals he/she would be depending on to have a liquidity event. It begs the question, why would an advisor voluntarily place his / her faith in people he doesn’t know and has never worked with. He is merely adding more risk to the gamble.

In contrast, working for an established independent firm that has history and branding offers several key advantages:

Brand recognition makes it easier for the advisor to communicate the narrative to his investor client in the transition process.

Brand recognition gives the client a measure of warmth and comfort which gives the advisor the confidence he needs to make the transition along with the asset transfer itself. One often necessitates the other.

A firm with age and history gives the client-investor the comfort he needs to provide his/her advisor with consent to transfer out. It assures the investor of the sanctity of the institution itself and the advisor’s own security within it.

An established dealer offers powerful signing bonuses and retirement buy-outs, allowing the advisor to precisely calculate what his present and future economic value will be, unaffected by any other advisors or considerations. He/She becomes master of their own destiny. Their own practice makes them the ultimate individual of capital rather than being a shareholder in an untested, undetermined entity

Very few independent Broker dealers meet this threshold. But for those that have strong presence, branding and quality infrastructure together with strong profit margins and operational/growth capital – these institutions best provide strong grid payouts, competitive signing bonuses and attractive buy outs for retiring advisors:

All these advantages currently exist without the all too common sinister tragedies of shareholding reviews, dilutions, share valuations, or early sell outs. These common issues become nothing but harmful complications and impediments to any advisor preoccupied with the transition, on boarding and smooth continuity of his/her own business.

Shareholding can sometimes be a virtue. But in a struggling private broker dealer, it becomes a vice with an albatross around his neck: The advisor is locked in. And getting out is a nightmare of a potential economic loss and the single biggest distraction to his business.

By their very nature and stage of development, early-mid stage start – ups often create ongoing distractions that impede an advisor’s growth and stunt his confidence in a firm with very subjective, conflicting agendas.

In the advisor’s quest for the next transition, the Advisor-Portfolio Manager needs to conduct the same due diligence on his/her own transition as he / she does on the client’s investment portfolio. Because focusing on making a transition for the right reasons and the right structural environment is not only in the client’s best interest but ultimately the
advisor’s too.

In business practice and etiquette, we often take it for granted that most people know what the right thing to do is. We also assume that common courtesy and manners is an obvious, assured thing that everyone practices. But not everyone does.

Unfortunately, experience often teaches us otherwise. And the fact that we have to point it out is itself very troubling. It is often this behaviour that results in self – destructive consequences not only for the Individual but the very employer he/she represents!

Just like an individual going on his/her very first date, you want to make the very best impression with your date. For every employer out there, just imagine this is your first date with someone! Impress them in the same way you would expect them to impress you. More often than not, a first bad date will be the last one.

Here are some obvious but invaluable musts:

1. Unless you are expecting an emergency call: NEVER bring a CELLPHONE into a meeting room. Never put it on the table. And if it is absolutely necessary, always turn the Ringer OFF and place it out of sight. Or Face down on a nearby chair! (If you must, always make sure you inform the candidate of a potential emergency call at the start of the meeting!)
2. NEVER SWEAR or use any foul language in an interview. It doesn’t matter the occasion or context. Doing so shows poor taste in language and complete lack of courtesy in communication. It is a complete turn off!
3. NEVER EAT OR CHEW GUM. Only water, coffee, tea or a standard non – alcoholic beverage is considered commonly acceptable practice in any business meeting.
4. Always wear a casual jacket – pants in any interview. This shows common decency and respect for general business attire. A tie is a strong asset but it is not a must have.
5. Always prepare and ask as many relevant questions. Spend 50% of your time listening and the other half answering the questions being asked. Always invite – encourage the applicant to ask Questions.
6. Remember: Talking about yourself only prevents you from asking the critical questions to generate the information you need. That is the only purpose of the meeting!
7. Encourage the Candidate to be open and honest. Invite the candidate to talk about him/herself. Encourage him/her to ask as many questions he/she would like. Stimulate Interest and always engage the candidate.
8. Every Interview is a TWO – WAY STREET for both parties! It is the opportunity for the candidate to show his/her best face. But it is also the Employer’s opportunity to skillfully ‘sell itself’ as the ultimate employer every candidate would love to work for!

In an era of unprecedented, saturated competition for strong & ever so scarce talent, every little thing about the recruitment process becomes important.

Your actions reflect the company itself. It is a talent show that must go off without a glitch. And there’s nothing worse than showing bad manners and disrespectful communication. It is such an easily avoidable vice.

For both young & senior professionals seeking quality of life, cash-based compensation, short commutes, meaningful social relationships in the workplace: who they work for and how the firm represents itself – will ultimately define their attraction to and interest in YOUR firm.

Like the old Deodorant Commercial says (and just like every First Date) You really only have one chance to make a first impression!

Time and time again, we have heard too many horror stories of private independent Canadian broker dealers doing shareholding ‘re-evaluations’, having early sell outs and liquidity issues: The truth remains: Wealth advisors really don’t know what they are getting into when they go in– and they certainly don’t know what their exit strategy is going to look like getting out. Why buy equity in a private stock when you cash a healthy bond yield today?

No matter how glamorous the projected glossy valuations may appear to entice advisors; just like the stock market, nobody can predict a five – year time horizon. That’s a lot of time and effort to expend for an unpredictable outcome!

A simple multiple on revenues tells an advisor what he/she would receive going into the game-and the same defined formula tells the advisor exactly what their exit looks like going out. The advisor doesn’t need to worry about revised shareholding valuations, potential early sell outs, or depending on other advisors to grow their own business to assess the viability of their own liquidity event. There are simply too many variables beyond his/her control that only result in unnecessary, adverse consequences. 

Wealth Advisors have enough to contend with, dealing with their own clients and market challenges. They certainly don’t need to add to their woes, worrying about the existential future and ongoing complications of their own dealer.

If an Advisor is reluctant to sell a ‘private’ security to their own client, then why would they work in one! 

Holding stock in a private company robs the advisor of having control over their own business. It is often an illusory promise that quickly fades. A cash – based transaction allows the Advisor the ability to control the exact time and value of that liquidity event. In these turbulent times, it is the one certainty they can count on. 
Advisors get paid to provide their clients with peace of mind. Investment Advisors are people-consumers too: they are certainly entitled to the same comfort. And in a highly turbulent world, only a cash – based transaction provides him /her with that measure of safety.