Why advisors should look closely at Raymond James' equity offers

Raymond James is offering its independent advisors a deal: If they need cash to invest in technology, hire staff or buy another firm, they can raise it by selling part of their practice to Raymond James.

Or how about capital to buy a book of business from an older colleague who's planning to retire? 

All of that's now on offer deal through Raymond James' Practice Capital Solutions unit, which already provides loans to affiliated firms needing capital infusions for various purposes. To advisors who agree to the new minority-ownership proposal, Raymond James is promising they will maintain control of their practices. And if they ever want to buy back the share they sold, they'll be able to do so at "clearly defined, favorable terms."

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"Our approach reinforces book ownership and advisor independence, solving capital needs while strengthening our partnership as their equity investor," Emma Boston, Raymond James vice president of strategic operations, said in a statement.

A spokesperson for Raymond James confirmed the equity stakes will first be offered to advisors working as independent contractors, of which the firm had 4,961 at its last official count, and that similar opportunities will eventually be extended to advisors in other channels.

The trade-offs of equity deals

Raymond James is far from the only large wealth manager that has taken to buying equity stakes in affiliated independent firms. LPL Financial, for instance, bought its former branch Financial Resources Group Investment Services in a deal that closed in 2023 and acquired a minority stake in another branch, Independent Advisor Alliance, that same year.

Brian Hamburger, the chief counsel of the Hamburger Law Firm, said such deals can no doubt provide advisors with much needed capital but can also come with some entangling strings attached. Many times, for instance, firms that claim a minority share in an advisory practice insist that they be given the right to outbid any other potential owner that might one day want to purchase another stake.

"And that sort of provision in some cases is going to scare off would-be suitors," Hamburger said. "They're going to ask: Why am I going to bid up an asset, when there is another firm that can step in and play 'The Price Is Right' and pay another dollar for the asset and they own it? That provision limits the terminal value of the entity."

Hamburger acknowledged many independent advisors need cash for reinvestment, hiring or to finance their retirement plans. They shouldn't, though, allow themselves to be lured by the prospect of obtaining easy capital into signing just any equity offering, he said.

"Sometimes advisors see only the amount of capital that they could be getting by monetizing a piece of their business," Hamburger said. "They don't really understand the ramifications or the limitations."

Cash to buy retiring partners' books

Jody Papike, the CEO of independent advisor and executive recruiting firm Cross-Search, said one of the biggest needs for capital in the industry now is within practices working on succession plans. Oftentimes, junior associates within an advisory firm will want to buy the business out from older colleagues looking to retire.

But they may lack the cash to pay the going rate for a book of business. Meanwhile, there are plenty of outside buyers, some of them financed by deep-pocketed private equity firms, who are happy to step in with generous offers.

Papike said most retiring advisors prefer to sell their practices to colleagues they've worked with for years. For one, that sort of handoff makes the retirement transition less jolting for clients. There's also less hassle if assets under management don't have to be moved to another firm.

"At the same time, there is so much capital being offered to buy a book of business these days," Papike said. "Advisors know that, and they don't want to go undermarket. So sometimes they have to look elsewhere than the folks inside their practice."

Keeping outside buyers at bay

Peter Nesvold, the managing partner of the consultant and investment bank Nesvold Capital Partners, said equity offers like those Raymond James is putting on the table are also a way for firms to retain control of practices they might otherwise be at risk of seeing walk out the door. Raymond James, he pointed out, has had its share of big losses in recent years.

Steward Partners, a large independent firm, departed in 2022, although many of its advisors have continued to use Raymond James as a custodian for their clients' assets. And SageSpring Wealth Partners, an RIA with $6.4 billion under management, left in January this year to join Dynasty Financial Partners, a network of independent firms.

Nesvold said independent practices that had been thinking about leaving Raymond James might now think instead for a capital infusion. Raymond James will secure "minority protections" in return, he said.

"It makes it much more difficult to leave the RayJay platform at a time when the mobility of advisors is very high," Nesvold said.

One of the most common ways advisors have moved firms in recent years is through merger and acquisition deals. Large independent broker-dealers and aggregators of registered investment advisories have been on a buying spree, bringing practices large and small within their orbits.

The industry-tracking investment bank Echelon Partners reported last month that purchasers of wealth management firms got off to a "record-breaking start" this year, with 118 deals announced in the first quarter. Many of the deals are supported with financing from private equity owners — whom Raymond James executives have depicted before as a not-always benign force in the industry.

'Good offense and good defense'

Speaking in February at an annual UBS Financial Services Conference, Raymond James CEO Paul Shourky said aid private equity owners often come in with a promise that they intend merely to provide capital and not interfere in management of advisory firms.

"As we all know, that typically changes," Shourky said. "And over time, sometimes sooner rather than later, we start seeing that disruption and the misalignment of objectives and priorities."

Jamie McLaughlin, co-founder of the industry consultant J.H. McLaughlin, said Raymond James' new offering is both "good offense and good defense." On the one hand, it gives the firm a convenient means of reinvesting in some of its most valuable firms. On the other, it helps stave off outside buyers who may be eager to get their hands on those same assets.

"The one main reason they're doing this is probably for retention," McLaughlin said. "But the other real reason is they're supporting these teams' growth. They are helping them essentially with funds that they couldn't have obtained out of their own free cash flow and they are giving them growth capital."