More than 50 percent of financial advisors are 50+ – and eligible for their AARP membership! Those 50 and over are also likely to have retirement on their mind. We ask our clients all the time: what does life look like in retirement? Maybe you’re finally taking those bucket-list trips. Perhaps you’re cruising or volunteering as a poll worker or at the animal shelter. Spending the summer providing childcare for the grandkids? We tell our clients to set goals, to plan ahead, and to follow through. Are you doing the same?
Maybe in five years, maybe in ten or fifteen years. As with any solid business strategy, determining an end goal and giving yourself enough time to put all those pieces into place is essential, especially when you are considering the sum total of your life’s work. Someone is literally going to put a price on it when you finally sunset that valuable book of business. What it is actually worth may be determined more so by how you go about selling it than what’s actually in it.
Think of this article as financial advice for financial advisors. When you’re about to make one of the biggest business decisions of your entire career, it’s important to take your time and consider all of the angles. Selling your business cannot be a rash decision that happens overnight. Poor planning can lead to a massive loss when the deal is done.
The primary factors in determining the real net value of a sunsetting book of business are what kind of a multiple will you get on your total revenue and how big of a slice will the Internal Revenue Service (IRS) take after the sale. And those factors are going to vary quite a bit when you’re sunsetting with a wirehouse versus sunsetting with an independent broker dealer.
Sunset at the Wirehouse
When the sun goes down on a book of business at any of the major wirehouses, the deal is generally going to be similar in structure. The wirehouse will typically offer a 1X multiple on total revenue. That influx of cash will be treated as ordinary income by the IRS. The financial advisor signs off any rights to their clients and to that book of business.
Sunset at an Independent Broker Dealer
Consider a better alternative. Instead of winding down your practice at the wirehouse, what would happen if you joined an independent broker dealer firm instead? When it comes to sunsetting your book of business, that book of business has now become a legitimate asset. This is widely recognized by the financial services industry, along with most banks, who might lend against that asset in the event of a sale or succession.
Most importantly, let’s look at what the IRS says. That book of business is indeed recognized as an asset by the IRS and is taxed accordingly. This means you own the asset in its entirety and can sell it, borrow against it, or will it to another person. In the year that it is sold, the book of business will be taxed as a long-term capital gains event.
As we alluded to earlier, there’s a fairly significant difference between an income tax rate at ordinary income and the tax rate for long-term capital gains. As of today, the tax rate on ordinary income can range from 10% to 37%, depending on your individual tax bracket and filing status.
On the other hand, long-term capital gains taxes are much lower, coming in anywhere from 0 to 20%, depending again on filing status and tax bracket. At the high end, would you rather pay the IRS 37% or 20%? We think most people would agree in this case that less for the IRS means more for you and your family.
Let’s Do Some Math
“Toby” is getting ready to retire. He’s looking forward to spending more time with his wife, their kids, and their three beautiful grandchildren. They are planning to take a family trip to Italy when the time comes, and Toby just purchased a new golf cart in anticipation of getting out on the green more often.
He’s still a few years away, but Toby knows that he needs to make some decisions today to maximize the value in his book of business and make sure he walks away with as much as possible. He and his wife have lots of plans and they both worked hard to ensure a comfortable retirement.
Toby could sunset his book of business at the wirehouse he’s been with for years. For his book of business that has $1 million in total revenue, the wirehouse will multiply it 1x, giving him $1 million as a parting gift. The IRS imposes a 37% tax rate, claiming $370,000, which ultimately nets Toby $630,000.
It’s not bad. But Toby wonders if he can do better by switching now to an independent broker dealer firm. There, he’ll be offered a 3x multiple on the book of business revenue, which bears out to $3 million. It’s considered long-term capital gains, so the IRS only takes 20% – or $600,000 – leaving Toby with $2.4 million.
That’s nearly four times as much as what that book of business would be worth if he stays and sunsets at the wirehouse.
It shouldn’t be a hard decision. If you want to earn up to four times as much for your book of business when you’re ready to sunset it, consider joining an independent broker dealer firm today.
Want to Keep the Conversation Going?
Thinking about sunsetting your book of business and weighing your options? All of us at Terrana Group welcome the opportunity to consult with you to determine the right platform for you going forward — one that satisfies your long term objectives and is also best for your clients!
Over the course of more than 30 years, we have consulted on and closed thousands of professional placements for Advisors, nationwide, in most every major city throughout the United States, with client assets transferring exceeding $67 billion dollars. We have built deep relationships with the advisory world’s most sophisticated and notable firms — including Wall Street Brokerages, Regionals, Boutiques, Banks, Independent Broker Dealers, RIAs, and Custodians. Our broad knowledge of those firms and the deals that are currently being offered will ensure that you are being presented with the right firm choice, platform, and the offer which is best for you.
Confidentiality, professionalism, and respect are protocol to our practices and beliefs; we handle each and every step of the placement process with complete communication, keeping you informed while making the process smoother from beginning to end.
We are proud to always be considered as a great asset by our clients because of our proven expertise, many years of knowledge, and acute attention to detail. Financial Advisor Recruiting Services are not all created equal; we guarantee that the TG experience for clients and candidates is always world class.
We are based in Chicago, with a nationwide reach. Let us know you are interested by contacting us today. To get the conversation started, email info@terranagroup.com or give us a call at 312.655.8380 today.
