Is your custodian or IBD holding you back?

Will your custodian or independent broker-dealer hinder your succession plan? While many of these organizations are helpful when an adviser sells or merges, some may actually be reducing the value of your firm.

As everyone is aware, the wealth management industry is going through a period of consolidation. While the number of firms for sale has increased, so too has the number of buyers, which, in a mere five years, has resulted in a roughly two-fold increase in selling prices.

Several years back, there were only two major RIA consolidators: Focus Financial and United Capital. Today there are a few dozen, with firms like Mercer, Wealth Enhancement Group, Mariner Wealth Advisors, Beacon Pointe Advisors, Allworth Financial and others all completing multiple deals each year.

The two major custodians, Schwab and Fidelity, are very accommodating to mergers and acquisitions, and will step in and offer support to help facilitate a transaction.

While this is true for other custodians as well, it’s certainly not the case for all.

The fact is that some custodians and IBDs will require an advisory firm move its assets off their platform if it’s acquired or merges with one of the consolidators. Further complicating matters, those custodians and IBDs may not allow the adviser any access to historical data, which, when it comes to client care, can pose a serious challenge.

Why does this matter to a financial adviser? If your custodian or IBD won’t allow you to retain your assets with them, they’ve created a major barrier to selling your firm. You will either need to limit your potential acquirers to those already affiliated with your custodian, or an acquiring firm will have to endure the cost and hassle of moving all your clients’ assets off their platform.

Either way, you’ve reduced the number of potential suitors and, by extension, decreased the value of your practice.

I cannot stress this enough, but if you are considering monetizing the value of your practice within the next several years, you’ll want to make sure you have as much flexibility as possible before negotiations begin.

Some of the questions you may want to ask your current custodian or IBD: What happens to my client accounts should I sell to another firm? Will you require that the accounts be transferred? Will you permit the transfer of historical client data, subject to a client’s consent? 

One of the forward-thinking trends we’re seeing is teams leaving the national and regional wirehouses to set up their own shops so that they're better prepared for a liquidity event sometime down the line. If this is you, you’ll want to make certain that any firm you are joining will accommodate a change in ownership without a requirement that any acquiring party must already be associated with the custodian. If not, you’ll be severely limiting the number of potential partners.

Fortunately, power within the industry has slowly shifted away from the large captive organizations to the individual adviser. This is a trend that I certainly hope continues.

[More: Bear markets chip away at firm valuations]

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.