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Ex-LPL RIA Touts Financial Backing Before BD Launch, Offers Equity to Advisors

By Mrinalini Krishna January 24, 2019

Independent Financial Partners, an RIA poised to launch a broker-dealer in April, says it has received financial backing for the firm and is offering an aggregate stake of up to 15% of total equity to joining advisors.

IFP parted ways with LPL Financial’s hybrid RIA platform, where it had an office of supervisory jurisdiction status, in April last year. It is awaiting Finra approval to launch its broker-dealer.

The financial backing is coming from two key partners, Pacific Current Group and NexBank.

Australian Securities Exchange-listed Pacific Current Group has purchased a 10% interest in IFP in the form of permanent capital, IFP says in a statement. IFP says the permanent capital equity structure is better than a typical private equity investment because it reflects “a long-term partnership,” which its CEO, Bill Hamm, “was adamant about having.”

“We’re not looking to build this firm and flip it in five years. Rather, we’re looking to disrupt our industry and build a long-lasting company,” Hamm says in the statement.

Pacific Current Group will own 10% of the broker-dealer and joining advisors will have an aggregate stake of up to 15% in the firm, while IFP and its principals will maintain control with the remaining majority stake in the firm, according to the statement.

IFP points out that rather than asking advisors to invest, it is “granting them shares as a way to thank them for their loyalty.”

Output and tenure will help determine how much equity advisors end up getting.

Chris Hamm

Chris Hamm, IFP’s chief operating officer, tells FA-IQ the shares to be received by the joining advisors will be divided based on production size. He adds that there will be a “slight adjustment for tenure, so some guys that have been with us for a while will get a slight enhancement for that.”

Speaking in general terms and not about the shares being offered by IFP to joining advisors, recruiters caution advisors when evaluating equity-based incentives and suggest looking at the deal structure carefully.

For Jodie Papike, president of recruiting firm Cross-Search, the “most important” question to ask is “What is the structure?”

She continues: “Is it a vesting schedule that you’re going to be going off in order to have this stock be given to you? … Is it something where if you ever wanted to leave, you have to sell your shares?”

Beyond those questions, Papike suggests going “even deeper" when doing due diligence about such offers. “If you have to sell your shares, how is it evaluated? Is it evaluated once every six months?” she asks.

Typically, shares are evaluated once every year, according to Papike, so joining advisors must find out if they can’t get their equity out of a firm until an assessment of the value of the firm is made.

While there have been some very public disagreements between IFP and another LPL OSJ Independent Advisor Alliance about advisors moving to IFP, Hamm expects to have 225 to 250 advisors on board by the time IFP launches its broker-dealer and hopes to end the year with more than 300 advisors. He says the company is also conducting due diligence for three acquisition opportunities, each with over 100 advisors.

Meanwhile, COO Hamm says the Pacific Current Group’s $1 million investment in the broker-dealer – which is the current equivalent of 10% – is “nebulous” and that the “permanent capital partner” will have the option to increase its stake by 15% in future.

“It’s more of like a fixed-income investment for them, where they get their return every year, [the] IRR they require [since] there’s no plans for them to exit,” the COO says, explaining the arrangement with Pacific Current Group.

The COO says IFP “had do a flat amount to make it easy at 10% investment to give them the skin in the game.”

He notes that “was based on kind of the hybrid valuations, which would obviously be lower, knowing that down the road when we convert everything – and we’re a fully running broker-dealer with full control and obviously additional revenue lines – that they’d have the additional ability to purchase another 15% at that point in time.”

IFP says it also has a credit line with Dallas-based lender NexBank SSB, a subsidiary of NexBank Capital, which the company expects will help “grow its infrastructure as well as its advisor headcount.”

The company also revealed its payout grid that offers advisory payout at 64% and commission payout at 57% for total annual production of up to $25,000 on the lower end. At the top of the range, for total annual production of $2 million or more, the advisory payout stands at 97% and the commission payout at 95%.

But in an industry where larger broker-dealers are looking to expand in the hybrid RIA space, is IFP’s move counterintuitive? The COO disagrees.

IFP’s business was split 80-20 between fee-based and broker-dealer for products like variable annuities. That meant once IFP left LPL, the firm either had to join another broker-dealer or create one on their own, according to Hamm.

“People don’t understand that even if you have a fee-based business, if you have a broker-dealer, it actually allows you to clear those assets through your broker-dealer and become more profitable. And becoming more profitable for us meant that we can now put more money into more systems and processes for our advisors,” the COO says.

“In a hybrid environment at a broker-dealer, the broker-dealer makes a lot of the margin and you’re kind of left with whatever you have as a hybrid, whereas by creating our own, we now grab all the margin which means we have more money to kind of do stuff with for our advisors that we weren’t able to do in our other environment," he adds.

Cross-Search’s Papike says broker-dealer consolidation in general has created a market opportunity for mid-sized firms.

“A lot of advisors are really looking for an opportunity [where] they can be with a mid-sized firm, where they can have an impact, and they know everybody, there’s a real strong sense of culture and community,” she says. “There are still plenty of advisors that are looking to be in that kind of structure.”