Where’s the liquidity? Historic financing options for IBDs and RIAs

Today, 68% of advisors cite securing M&A financing as crucial to their growth; however, only 17% of advisory practice acquisitions receive bank financing. Historically, banks have been reluctant to lend to financial advisors due to zero or negative net tangible collateral valuations and unpredictable cash flows generated by the transactional revenue model. However, as the transactional nature of wealth management practices has evolved into more predictable fee based revenue, select banks are becoming more comfortable with advisory loans.

Currently, there are over trillion in advisory fee accounts and growing at over 20% year over year. As a result, advisory practice lending firms have emerged. One bank – Live Oak – dominates the nascent advisory lending market.

Live Oak is the leading advisory lender in the U.S. and has the lowest default rate of any FDIC bank in the nation. Live Oak has closed over $500 million in advisory loans, primarily RIAs, since 2013 with zero charge-offs to date. Live Oak has utilized the SBA structure for a substantial percentage of their advisory loan portfolio.

The financing options available to IBDs and RIAs is evolving rapidly. Today, Succession Lending offers SBA and conventional financing through our network of banks. Our conventional lenders offer attractive, fixed rate options over seven to ten-year terms.

So, what are the key differences between a SBA loan and a Conventional commercial loan and how does an advisor begin to choose?

Banks started with and appreciate SBA loans to financial advisors for the simple fact that the loan is guaranteed to 75% - 90% of its value by the program. The bank can make a loan and, in the event of default, they are reimbursed and there is little risk involved. In addition, the banks are often able to package and sell the loans. This creates non-interest income and diversity of revenue to the bank while allowing the bank to keep within its industry concentration limits.

SBA loans have been a tremendous benefit to financial advisors. On cash flow based loans without a significant amount of collateral, the banks have not been able to assess risk. If they can’t see it and take it back, it is hard to justify the lending risks. Detractors of SBA loans point to the high origination fees, cumbersome paperwork, and the extended time it takes to navigate the loan approval process. The gateway that SBA loans have provided is historical evidence of mature deals and zero charge-offs. This credit history affords banks to explore conventional commercial loans to an industry they have largely ignored.

Wealth management and financial advisory practices are going to become a burgeoning market for banks as conventional commercial loans are written. Currently, most banks do not understand financial advisory businesses. They will gladly accept a loan application and then promptly sit on it for six months as they assess how to price the risk. Like any loan application, a conventional commercial loan is still a time intensive and cumbersome process of completing paperwork, gathering practice data, answering basic industry questions, collecting more practice data, and finally supplying that same data multiple times as the application navigates its way through the credit approval process.

However, a conventional commercial loan can be worth the work for many advisors who choose to undertake them, as total fees are generally lower. The commercial loan also has different restrictions for business owners, which can allow an advisor to purchase an entire business rather than just an assets sale. Partnerships and partial sales also become a possibility. With the maturity of the industry and shift to teams and ensemble practices, the ability to apply for a loan under a business name and have several partners share responsibility for the loan is tremendous. Funding limits can also be higher with a conventional commercial loan, meaning a buyer can provide 75% to 100% of the practice purchase price to the seller. Larger funding options have wider implications on motivating a sale and cash flowing an acquisition which will begin to impact valuations.

Identifying the right loan for a wealth management or advisory practice can make or break the practice acquisition. In addition, capital lending within the wealth management industry will have a positive impact on valuations, succession planning, and business strategy for a rapidly changing industry.