Signature Estate & Investment Advisors, a $32 billion hybrid registered investment advisor based in Los Angeles, has shifted 10 of its former 1099-affiliated advisor groups into its W-2 model over the past year as part of a long-term strategy that is gaining momentum across the financial advisor space.
SEIA’s move to bring advisors into a W-2 employee model began last year with its founding partners, and has since expanded to other long-tenured advisor groups. President Matt Matrisian, who joined the firm this April from AssetMark, said the move is part of an evolution for SEIA toward a longer-term, unified business.
“Foundationally, what we want is advisors in our ecosystem,” Matrisian said. “We want them to be advisors so they don’t have to be business owners doing HR, operations and all the other functions. … We’re taking that overhead and operational expense and we absorb that as a company.”
Matrisian said SEIA will continue to be a “dual affiliation firm,” with both W-2 and 1099 options. However, the firm’s strategy is to continue discussing the W-2 option with advisor teams, expecting more will be added internally and through external acquisition. The firm’s backers, which include private equity firm Reverence Capital Partners, are helping to fund the buyouts required to shift advisors into the W-2 model in a manner that Matrisian characterizes as a “rising tide that will lift all boats.”
The pitch for advisors to shift into a W-2 model is becoming more common for RIA aggregators and independent broker/dealers who grew via 1099 affiliation. This year, Mariner Wealth Advisors announced its first affiliate mover to the W-2 model. OnePoint BFG Wealth Partners (backed by Rise Growth Partners) transitioned 80% of its assets from 1099 to W-2. Independent broker/dealer Osaic has been growing its W-2 channel through both hybrid and fee-only channels, and this week Hightower launched a new branded RIA channel that will ultimately bring advisors into a W-2 format.
Jessica Polito, founder and principal of M&A advisory Turkey Hill Management, said the strategy is particularly true for firms with external investors looking to further operationalize RIAs for either recapitalization or an eventual public listing.
“The valuation is going to be much higher with W-2s than if they had a bunch of 1099 advisors,” she said. “The cash flow is much stickier and it’s just a better business model. … The reason that private equity likes wealth management so much is that it has a predictable cash flow, but it’s significantly harder to predict when all of your advisors are free agents.”
The difficulty, Polito said, can be getting often fiercely independent advisors to give up long-term control of their book of business and high revenue margins.
“The people that see value in it are generally partnered with a firm where they see growth potential that will be significantly faster than if you were on your own,” she said. “You’re trading your book for another illiquid asset, and when that liquidity happens you are counting on it being worth more than if you just held onto your own business.”
According to Matrisian, SEIA’s success in getting advisors to move is a combination of a strong offer and the evolving needs of the firm’s advisors.
“What we find is that we can free up time and complexity from that advisor’s workload and get them out of the day-to-day of running a team, running internal operations, managing portfolios, doing all those things that take time away from engaging with their clients,” Matrisian said. “They are much more efficient, they are going to be able to drive higher growth, they are going to have a higher satisfaction rate and their general career satisfaction will be higher.”
Shifting Tides
SEIA started out as a traditional 1099, office of supervisory jurisdiction, with four individual advisors gathering under one umbrella. The firm continued to grow from there, adding 1099 advisors while providing access to a full technology stack, back office work, and estate and tax planning help.
Today, the firm has about 140 people in 28 offices managing just over $20 billion in wealth and another $12 billion through its broker/dealer, Signature Estate Securities. The firm also runs its own TAMP and has custodial referral programs via AssetMark, Charles Schwab and Fidelity Investments.
Losing control of the total revenue of his practice was a concern for Mark Copeland.
SEIA created a model for the W-2 switch with its founding partners. In broad strokes, that meant a reduction in their payout—with a percentage drop from as much as 85% to about 35% or 40%, depending on their production. In exchange, the advisor would get a large buyout, including incentives depending on their growth. They also got an equity stake in SEIA that would allow them to participate in the larger entity’s growth based on EBITDA.
“They can now participate in a growth multiple that is probably more significant than they would have as an individual practitioner,” Matrisian said.
Mark Copeland is one of those founding fathers. He has been with SEIA for 28 years and admitted that converting to a W-2 platform was “daunting.”
“The biggest hurdle for me was the thought of losing control of the total revenue of my practice,” Copeland said. “The loss of control of practice expenses, marketing expenses and ultimately control of practice profitability initially made me uncomfortable. Ultimately, SEIA overcame this hurdle by taking the time to establish a practice strategy consistent with how I have run my business in years past.”
Copeland said he worked with the firm to create plans for marketing, business support and growth.
“I was able to see that my day-to-day life was not going to change significantly, and the practice’s profitability improved due to the scale of SEIA resources,” he said.
He also anticipates a good outcome from the equity stake.
“At this stage in my career, I expected SEIA as a firm to grow faster than my practice, and I have been correct,” he said. “The ability to take some equity when I transitioned allowed me to participate in the growth more significantly, and I find that I focus more on the firm than just my practice.”
Matrisian said that realizing the equity stake will come at the firm’s “next monetization event.” That could be when Reverence sells to another private equity fund, recapitalizes its own fund, or, though Matrisian didn’t offer this option, sells to some other buyer. Whatever the case, at that time, advisors with equity could look to cash out or potentially stay rolled into the next investment setup.
The Right Time
M&A banker and consultant Polito said the switch to W-2 is generally going to be for advisors in at least mid-career, if not older, as it requires a combination of building up a large book and considering the firm’s ultimate monetization and succession plan.
However, getting them into a W-2 model, which often includes signing non-solicitation agreements should an advisor decide to leave, can be a high hurdle. Most firms are offering buyouts of nine or 10 times the multiple, along with an equity stake in the parent RIA.
“Think of it is as mini M&A,” Polito said. “You’re getting 40% of what you would make over the next nine or 10 years up front today. That tends to get people over the hump.”
To be sure, there will be plenty of 1099 affiliation models left for advisors who prefer that less captive route. But despite the challenges and costs for firms to implement W-2 transition programs, Polito expects more RIAs to put them on the front burner.
Getting shares of the company was important to Jennifer Kim to switch from a 1099 to W-2 designation.
“The 1099 works as a gateway a lot of times for advisors or teams that are breaking away from wirehouses,” Polito said. “It acts as a stopgap between owning your clients at a wirehouse or large broker/dealer and being a W-2 employee. But the question of how to then get advisors to agree to convert from 1099 to W-2 is hard.”
For Jennifer Kim, a managing senior partner at SEIA, the move to W-2 made sense after being a 1099 affiliate with SEIA for over 30 years.
“Getting shares of the company was important for me,” Kim said. “If it wasn’t for that, I might not have done it. That was a big draw.”
Kim, who does not plan to retire anytime soon, said the transition has not meant much of a change for her group or how she operates. It has, however, taken some operations off her plate, which has led to more time with clients and less dealing with logistics and administration.
“The earlier you make the decision, the better off you are,” she said. “I wasn’t one of those people who were mulling it over a long time. That’s not my personality. Ever since day one, my goal was to do as much as you can and keep growing.”
