Alex Hansen of Merit Financial Advisors thinks there’s a misconception in wealth management that the only reason advisors switch firms is to secure a big transition check to help seed their retirement.
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For evidence of how off-target that is, he said, look no further than Strategic Retirement Plans, a Billings, Montana-based firm that joined the RIA acquirer Merit from Commonwealth Financial Network last week. Strategic Retirement Plans, which has nearly $577 million in assets under management and $5.35 million in retirement plan assets under advisement, is run almost entirely by people in their 30s and early 40s.
Retirement couldn’t be further from their minds.
“It bucks the perception that the only people who explore a sale transaction are people who are kind of past that growth-mode phase, like they’re kind of taking chips off the table,” said Hansen, himself a former Commonwealth employee.
Hansen last year left a position supporting RIAs at Commonwealth to become chief advisor success officer at Merit. Two of the advisors he has since helped bring aboard — Gabe Lapito and Ryan Gomendi — founded Strategic Retirement Plans as a Commonwealth affiliate nearly 20 years ago.
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Lapito and Gomendi now number among hundreds of advisors who have said goodbye to Commonwealth after news broke just over a year ago that it would be acquired by LPL Financial. In dozens of interviews, former Commonwealth representatives cited reasons for exiting as diverse as dread at the prospect of joining a much-larger firm to disappointment over the way the sale was announced.
For Lapito, the decision to leave came down to a desire to find a partner that could help his firm achieve its growth ambitions. He noted that when he and Gomendi started Strategic Retirement Plans 19 years ago, Commonwealth had around 500 advisors.
By the time of the sale to LPL, that headcount had increased to roughly 3,000. In many ways, Commonwealth and Strategic Retirement Plans grew in tandem.
Now Lapito is eager to do essentially the same at Merit, a frequent acquirer of RIAs that has been on its own steady growth trajectory since its founding in Alpharette, Georgia, in 1998. Merit now numbers 60 offices throughout the U.S., a total Strategic Retirement Plans will add to with a new location in Gillette, Wyoming.
Until 2024, Merit was itself affiliated with LPL as an office of supervisory jurisdiction, or a large advisory practice that handles compliance matters internally. Much of its growth has been fueled by a minority stake the private equity firm Constellation Wealth Partners took in it last year.
Still, Merit remains relatively small in the wealth management industry. Its roughly 150 advisors with nearly $25 billion in client assets are easily overshadowed by LPL’s more than 32,000 advisors and $2.3 trillion in client assets.
Lapito said he has nothing but respect for LPL.
“I wouldn’t say I was necessarily running away from LPL as much as I was trying to find what I’ll call Commonwealth 2.0, which was with quality and community, a smaller group of advisors, a smaller set of people that had a similar vision,” Lapito said.
LPL did not return a request for comment. Executives at the firm have previously expressed confidence that they would hit their goal for retaining at least 90% of the $305 billion in client assets Commonwealth had at the time of its purchase.
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Equity stakes versus an all-cash multiple of EBITDA
Unlike firms that buy RIAs outright for cash, Merit instead offers compensation partly in the form of ownership stakes. Declining to go into specifics, Lapito said an equity offer made up more than half of what Merit paid for Strategic Retirement Plans.
His and his partners’ willingness to accept that sort of a deal is a clear sign that they have their sights set on growth, Lapito said.
“Part of this concept of equity swap is that it’s not like you’re just selling out and leaving, like you’re 65 and ready to retire,” he said. “If I was ready to do that, I would take it in cash.”
Experts at valuing registered investment advisors and other wealth management practices say one of the biggest influences on selling prices is a firm’s growth prospects. In a report last month, the industry valuation consultant Advisor Growth Strategies found that RIAs with $500 million under management last year were going for anywhere from nine to 15 times their EBITDA — earnings before interest, taxes, depreciation and amortization. Among factors allowing firms to obtain a “premium” price, Advisor Growth Strategies cited both a “strong organic growth rate” and having a “growth-aligned structure.”
Some of the most common ways to measure growth are to look at annual increases in commonly cited numbers like revenue and assets under management. Hansen said Merit puts a particular emphasis on assets acquired from new or current clients rather than gains from the investment of existing assets. Hansen said many firms have been able to show huge AUM increases simply because the stock market was on a bull run for more than three years.
“But if you remove the market activity, there’s actually more money flowing out than is flowing in,” he said. “That’s why we’re looking under the hood. Is the business growing without markets? Are they bringing on more clients?”
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Like many firms, Merit seeks to relieve advisors of routine tasks related to human resources, technology, marketing and compliance so they can spend the bulk of their time helping existing clients and bringing in new ones. Hansen said he thinks the idea of independence is often oversold in wealth management.
Advisors who leave a well-established firm like Commonwealth often do so with the notion that they’ll be shedding constraints they believe were holding back their business. What they instead often find in running their own practice is that they have to devote so much time to back-office functions that they have precious little left for clients.
Hansen said he thinks that’s even the case at so-called independent broker-dealers, where advisors’ status as independent contractors, rather than direct employees, is supposed to come with more autonomy.
“But a lot of advisors in the IBD channel, they get so busy with the HR and managing investments and interviewing people, and they’re doing compliance tasks, that their growth rate effectively stagnates,” Hansen said.
In the race to recruit Commonwealth advisors since the sale to LPL was announced, independent broker-dealers like Raymond James, Kestra and Cambridge Investment Research have been the biggest winners. Lapito said he thinks that’s likely in part because many advisors simply feel comfortable moving from one IBD setting to another, rather than striking out into the somewhat different world of RIAs.
Also, at least some of the advisors who left Commonwealth have probably moved into what he likes to call the “lifestyle” phase of their careers. That is, they still want to be top-notch advisors, but they’re more intent on keeping existing clients happy than in driving growth.
“But I’m in my early 40s, and I want to continue to serve new clients,” he said. “I’m not ready to use the term ‘lifestyle practice’ yet. I mean, I live in Montana and Wyoming. So I certainly ski and fish and hunt and do all that stuff. I just tend to do it with my clients.”
