October 2024 • www . fa-mag . com

Synthetic Equity : A Sugar Substitute

As real equity gets scarce , synthetic versions might fit the bill .

KNOWLEDGE FOR THE SOPHISTICATED ADVISOR

Confronting Cybercrime

You could be on the hook with regulators .

Teaching Clients To Roll Over

Should you always shift out of a 401 ( k )?

AST MONTH IN THIS SPACE WE DISCUSSED HOW ADVISORY firms are enjoying record levels of profitability that would make them the envy of most other industries . This was revealed in the research conducted by Philip Palaveev of the Ensemble Group and BlackRock , and we thank them for bringing that research to our readers .

In this month ’ s cover story , senior writer Jennifer Lea

Reed examines recruiting and compensation trends in the independent broker-dealer world , which is also experiencing repercussions from the escalating battle for advisory talent . Different firms are embracing different strategies , and some , like LPL Financial , are recruiting very aggressively as others stay far more selective .

But some advisors affiliated with broker-dealers have been taking a longer term view . They want to see beyond the up-front forgivable loan they are being offered to join a firm and know what the potential long-term value of their firm could be a decade from now . Broker-dealers and custodians are , in effect , the back offices for all but the largest advisory firms , so it ’ s little surprise that many advisors are seeking their support and technology to empower them to take their business to the next level .

Still , there is a limit to how much growth a small group of senior advisors can achieve without adding capacity , which means bringing in younger advisors , many of whom are going to expect a piece of the action to consider remaining at a firm for the duration of their careers . This month Palaveev explores the option of offering these employees synthetic equity to achieve this goal .

Different firms are embracing different strategies and some like LPL Financial are recruiting very aggressively while others are far more selective .

The High Cost Of Luring Business

Synthetic equity can take several forms , which he describes in detail . But as the value of some firms , particularly large RIAs , has soared , it would appear to be an effective alternative to traditional equity , which has become so expensive it ’ s now out of reach for many young advisors .

Synthetic equity has another advantage . In most cases , it doesn ’ t tie an advisor to the firm to the degree traditional equity does . Of course , for young advisors launching firms in the post-pandemic world — and there are many — it remains to be seen whether advisory firms will command the spectacular multiples they have in recent years . In particular , the valuations of RIA firms in the private markets seem to many people to be stretched . But as long as assets under management keep rising , private equity investors and others aren ’ t complaining .

Still , many advisors are likely to retire in the next decade , and the big challenge is going to be replacing them with younger professionals who can not only service existing clients but bring in new ones . That story has yet to be written .

Evan Simonoff

Email me at esimonoff @ famagazine . com with your opinion .

8 | FINANCIAL ADVISOR MAGAZINE | OCTOBER 2024 WWW . FA-MAG . COM