Remaining with the bank may result in advisors losing out on millions of dollars in practice value if they’re not receiving adequate levels of asset referrals to justify the lower grid payout.

We recently posted a piece written by Zaw Tun, Associate Principal at Acquatio, on the independent wealth advisory landscape in Canada and its significant growth potential.

In the piece entitled The Future of Wealth Management in Canada is Independent, Zaw shared some analysis he has done on the minimum referral business a bank advisor should receive to adequately compensate them for the lower grid they receive at the bank compared to an independent financial advisor.

Many advisors reached out to us for further clarification on the calculations we used. Given the level of interest from advisors, we decided to provide a more detailed overview of the conclusions we reached through our research.

Overview of the Cases Analyzed by Acquatio

Let’s assume we have two advisors. The first advisor, whom we will call John, works at a bank as a bank financial advisor or portfolio manager. The second advisor, whom we will call Jane, is an independent advisor at an independent firm. Both advisors have $100 million in assets under management at the beginning of our analysis. We will also assume that both advisors have 10 years until they plan to retire.

John receives a grid of 45% at the bank, which means that for every $1 earned, John will receive $0.45 before tax. On the other hand, Jane receives a grid of 53%, meaning she will receive $0.53 for every $1.00 earned.

Both John and Jane charge their clients an average annual fee based on assets under management (AUM) of 1.0%. Additionally, we will assume that at retirement, both John and Jane sell their practice at 1.5 times the trailing 12-month revenue.

To ensure a fair comparison, we will not assume any growth in either practice, except for John’s bank referrals.

Jane’s Practice vs. John’s Practice Valuation 

Assuming no growth and a practice sale at the end of the 10th year, Jane’s practice has total cash flows of $6.83 million. Discounted by 10%, the present value of Jane’s practice is $4.24 million.

On the other hand, if we assume that John’s practice receives no referrals from the bank, his total cash flows over the next 10 years would be $6.00 million. The discounted value, using the same discount rate, results in a present value of John’s practice at $3.68 million.

To match Jane’s present value, John’s practice would require an additional $3 million per year. In other words, for John’s practice to be worth $4.24 million today, he must receive an additional $3 million of assets each year for 10 years.

But what if Jane’s practice receives a grid rate of 60% instead of 53%? By increasing Jane’s grid rate, her practice is now worth $4.69 million today.

If Jane’s grid rate increases by 7 points to 60%, John would need to receive at least $5.37 million per year in asset referrals from the bank network to match Jane’s $4.69 million valuation.

Key Takeaways for Advisors Considering Leaving the Bank Channel 

At Acquatio, we firmly believe that financial advisors, portfolio managers and investment advisors should perform this level of analysis to understand the true value of their practice.

That’s why we encourage our clients to complete a simple present value analysis of their own. Using this information, they can determine the magnitude of value they might be leaving on the table by not making a switch to an independent wealth management firm.

While our example above is relatively basic, it highlights the significant hurdle that bank advisors need to overcome to receive the benefits of staying at the bank. Additionally, it’s important to note that most independent advisors will likely receive a transition offer to move firms, making the hurdle even greater.

To determine if you’re leaving significant value on the table, Acquatio would be delighted to discuss your situation and explore how changing firms could enhance the value of your practice.

Are you ready to make a change? Book a free transition consultation with Joe Millott (joemillott@acquatio.com) or Zaw Tun (zaw.tun@acquatio.com) today.

References:

For a detailed look at our model calculations in Google Sheets see here