A firm known for going its own way in a top-heavy industry has unveiled a plan to land an outside investment within 10 years — and share 40% of the deal proceeds with its financial advisors.
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Tampa, Florida-based Independent Financial Partners is calling the recruiting and compensation pitch “Project 3.14” as a reference to giving advisors a piece of the pie, according to CEO Bill Hamm, who released a slide deck and essay on the idea’s origin earlier this year.
At 279 advisors and $19.5 billion in client assets under advisement, IFP has more than tripled its customer holdings since leaving LPL Financial to launch its own broker-dealer in 2019, he noted. The firm is bigger than most in wealth management, but much smaller than the giants that are rapidly consolidating the industry through recruiting and M&A.
“If anybody ever tells you that they’re not going to sell, they’re probably lying to you,” Hamm said in an interview. “We’re going to look for a particular type of transaction in 10 years — not LPL or Cetera. I’d lose half my people if that happened. … These other firms don’t really understand this: It’s the advisors that create the value.”
IFP is seeking “a private equity recapitalization or sale that retains IFP’s advisor-focused culture” while offering advisors a “participation percentage” from the deal. That percentage would be based on their revenue and use of the firm’s asset management arm and other services, with a distribution of 50% at the close of the transaction and the other half two years later, according to the deck. The company created the compensation plan “to reward advisors who remain with IFP through the planned transaction period while driving sustained profitability and growth,” it said.
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Be careful what you wish for, and sign up for
The offer joined other increasingly common equity bids aimed at independent advisors that come with the requirement to stay with the same firm without obtaining a controlling share in it.
But IFP’s offer stands out thanks to three factors: It carries no requirement that advisors sell equity or buy into the firm; its publicly stated timeline of an “expected transaction event by 2036” as cited in the deck; and Hamm’s signature criticism of large wealth management firms, which he argues have frequently placed shareholder returns above the interests of advisors and their clients.
“Advisors commonly learn of major transactions after the fact, with little opportunity for input,” he wrote in the essay. “Transition packages are structured primarily to retain assets, not necessarily to recognize or reward the professionals who built the value being sold. Decision windows are compressed, limiting meaningful evaluation of alternatives at precisely the moment when choice matters most.”
As much as they may agree with those ideas in general, industry recruiters say it’s important for advisors to read the fine print of any equity offer. The key factors to understand include the extent that they would obtain voting rights over important future company decisions, whether they could leave the new company someday without threat of litigation and any other contractual provisions. In addition, they might consider the fact that the private equity investors that abound in today’s industry may not be there 10 years from now. A decade ago, insurers controlled a much larger footprint in wealth management.
Most advisors “want to have more control over their destiny, not less,” said Rick Rummage, CEO of recruiting firm The Rummage Group. IFP’s pitch prompts questions about the exact date of the deal and the identity of the buyer, he pointed out.
“Advisors don’t want to go places where there’s uncertainty,” Rummage said. “That sounds like an interesting spin. I don’t think there will be a big percentage of advisors that are overly interested in that. Most advisors are independent thinkers who just want to run their practice and be left alone.”
Both he and Jodie Papike, CEO of recruiting firm Cross-Search, nevertheless acknowledged that IFP took a bold move by starting its own brokerage firm several years ago and, now, indicating its M&A plans in advance. However, Papike said the recruiting materials were missing some details and noted that advisors have shown clear preferences toward “remaining in the same type of ownership structure that they joined” when they make a big move to switch firms amid so much private equity-financed M&A across the industry.
“Whenever there’s a private equity firm involved, you just have to really understand the structure,” she said. “It’s critically important to understand the structure and make sure that none of those strings are there that you don’t know of until it’s too late.”
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An alternative in a competitive talent marketplace
For Hamm’s part, he pointed out that deal flow like LPL’s purchase of privately held Commonwealth Financial Network for $2.7 billion last year led IFP to roll out the long-considered plan. To qualify, they must generate production of at least $250,000 and stay at the firm through the transaction date. In cases of retirement or unexpected death, the advisors’ participation value in the future deal will remain the same, subject to dilution tied to the timing and the provision that the clients’ assets stay at IFP.
“There’s nothing mandatory about this at all,” Hamm said. “You just have to be with us at the point in time when we have the transaction.”
IFP intends to wait until it reaches a $1 billion valuation to pursue the deal, he noted. With company valuations and publicly traded wealth management firms’ stock continuing to rise in recent years, thanks to asset appreciation and cash-tied revenue lines, advisors should be reaping more of the benefits, Hamm said.
“The way advisors get treated by some of these larger firms is just not right,” he said. “I just think advisors serve a great purpose and they need to be rewarded for it.”
