Don't Stop The Music?

Yup, that is Rhiana's Don't Stop The Music single cover and it is also the theme of our times.

Deals for employee advisors, to change firms, started about 40 years ago. The bid back then was only wirehouse to wirehouse and twenty percent (20%) of GDC was the offer. Today "wire to wire" or "wire to HNW" can reach nearly 400% all in! Wirehouse Advisor average GDC growth over the same period is roughly 600% or double the rate of core inflation. Perhaps the single best, net of inflation, wage gain of any profession. What an amazing era to be in the business of advisory. For the full 40 years, spanning 5 decades, I have been of the mind deals would not go down. Stagnate in bad markets, but never go down for any full year. It was the only "sure thing" Wall Street bet at my disposal. But like any casino game, sooner or later, the streak has to break and smart players know when to go to their room or catch a show...

Deals are going to recede, and go down sometime in 2024 and beyond.

I believe we have seen the LT peak and it will be remembered as a blow off top! The impetus to deflate deals is a collision course of four critical values:

* The "high bids" are either out of the game, First Republic, or reasonably sated, Morgan Stanley and UBS. Newly founded BD/RIA offerings do not have the capital to pay a penny more than current. Some have already started a march to non-cash incentives (equity and enhanced payouts).

* Contrary to media and analysts jawing, America has no shortage of advisors and the great retirement won't change that. Continued technologic advances make advisors progressively more efficient. The march to 100% fee based has allowed for scale we could have never imagined 30 years ago when the trend first took hold. Some body count will continue to be needed at entry level but not in gen-pop!

* Deals peaked at a marginal utility point. Adding advisors, at today's prices, no longer adds incremental margin. In fact it puts pressure on margins. The money guys are gaining progressive power in the "C suite." Line items matter more than hopes and dreams of sales leaders.

* The great Field of Dreams movement of the pre-pandemic era is over. We are in, or entering, the five year renewal window of branches that were built for growth back when offices mattered. The consolidation exercise will intensify and the HQ demand to shrink real estate commitments will overwhelm recruitment aspirations. Huge savings here!

* When interest rates normalize custody cash, margin and short box spreads will narrow. The fuel for the current blow off top will be gone.

So what is the next evolutionary step in deals?

I am committed employee deals are capped and in recession already. There will still a few headline deals for "Mega-Monster Producers" but those will be PR bait. For the $3M and down advisors the peaks are in the rearview mirror. I don't expect the bottom to fall out but if you know you want to move, and know your want to remain an employee advisor, speak now or forever hold your peace.

The silver lining is that Independent Broker Dealer deals are stable, and for those who are 80% plus advisory, with $100M plus advisory AUM, they may still have a little room to the peak. IBD deals need to be assessed and accepted for their enormous leverage in building net worth. They are not to be approached for a lumpy cash transaction. In absolute Net Worth Statement value IBD deals can produce huge deltas to Employee deals in as short as 12 months. But they are not "buy a Ferrari appointment" day one. In 3 to 5 years they crush employee deals in both pre and post tax value. It is a never look back path. Similar can be said for RIA channel.

However, pure RIA deals are still unilaterally all about ever expanding enterprise growth and valuation. It is the the most powerful net worth tool but an overly cumbersome path absent a powerful self or investor funded base. The solution may well prove to be the supported RIA channel and or the employee RIA channel. We are starting to see deal options in both channels. Some are being shown with sliding scale options for cash plus equity. The lever still deeply favors equity but it is tempering with cash possibilities...

Summary

The cash deal high water mark has been made. A splash above the line from time to time but on average we have peaked and tide is moving out. No more crazy duration, three year to five year to ten year promissory note lives, will overwhelm the base economics. Equity options are the only fully advisor controlled deal values and they will continue to gain appropriate weight in advisor move decisions. In a generation of the most financially secure advisors in history that makes sense.

Love to hear your input.