Next-Gen Advisors: Navigating the Path to Ownership

As the wealth management industry evolves, so do the opportunities for next-generation financial advisors (G2 employees) to acquire ownership stakes in the firms they work for. With valuations of registered investment advisor (RIA) firms at record highs, buying equity has become increasingly challenging. However, there are several financing options available to help G2 employees overcome this hurdle and secure their place in the industry's top echelons.



1. Seller Financing and Outside Capital: Firm founders who own the company outright can offer shares of equity through seller financing, selling promissory notes to younger employees at favorable terms. Owners who have third-party investors can use that outside capital to help finance the sale of shares to next-gen employees. This option provides more capital but may come with strings attached, such as giving up some control or sharing profits with the investors.
2. Traditional Loans: More-traditional loans can be obtained through commercial banks and specialized lenders familiar with the wealth management business. These loans typically have lower interest rates and longer repayment terms, but they may require collateral and a good credit history. The risk lies in the potential for default if the business struggles to generate enough profits to cover loan payments.
3. Discounted Pricing and Favorable Terms: Some firms are willing to sell equity shares to next-gen employees at a discount to the M&A market to keep the firm independent and make it more desirable to attract and retain talent. For instance, Brett Bernstein, CEO and co-founder of XML Financial Group in Bethesda, Maryland, offers equity shares at a discount with favorable terms, such as adjusting the amortization schedule on the promissory note and deferring payments if the market goes south.
4. Private Equity Involvement: Private equity firms can also aid internal equity transfers. Mercer Advisors, for example, has had several major private-equity investors, which has helped the RIA expand its equity options for employees. However, private equity investments often come with high expectations for growth and returns, which can put pressure on the firm and its employees.

When exploring these financing options, next-gen advisors should consider the cost, flexibility, and risk associated with each. Seller financing and outside capital offer more flexibility but come with higher risks and potentially higher costs. Commercial banks and specialized lenders provide lower-cost financing but may have stricter requirements and longer repayment terms. Private equity offers significant capital but may come with the highest expectations and risks.

In conclusion, next-gen advisors have several financing options available to help them buy ownership stakes in the firms they work for. By understanding the costs, flexibility, and risks associated with each option, advisors can make informed decisions and secure their place in the industry's top echelons.