Jeff Gonyo: The Rise of the ‘Sell and Stay’ M&A Model

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Welcome to Barron's The Way Forward. I'm Greg Bartellis, and my special guest is Jeff Gagno, Head of Wealth Management at Steward Partners. He has been a partner at Steward since 2014 and has more than 30 years' experience in the financial services industry, including positions at Morgan Stanley and Merrill Lynch. Welcome to the podcast, Jeff.

Thank you, Greg. I appreciate it. It's been a great, great conference, and it's Great being here.

Excellent. Well, thank you so much for joining. You know, we're gonna talk today about sell-and-stay M&A deals and how it's so common now, and it's actually skewing towards increasingly towards younger advisors. But before we jump into topic, could you please tell us a little about your career and how you landed at Steward, et cetera?

Sure. You know, it's been a 32-year career so far. It's the only thing I've known coming outta college. I interned at Merrill Lynch, And, uh, at the ripe old age of 21, they made me a financial advisor and, uh, learned how to cold call and, and get through rejection and all of those great things. So built a terrific practice. Um, 10 years later, I was coaching and training within the Merrill Lynch program, and the idea of going into management, uh, became more prevalent for me. And Smith Barney recruited me from Merrill Lynch, uh, back in 2003 to join them in Albany, New York. Which is where I'm from. From there, I tell people that's when I lost my mind, gave up my book, and went into management. But it was a great path for me. It was the right path for me. And a stint in Albany for about a year, and that pushed me down to the D.C. area in 2005. And that was about the same time that Smith Barney was doing their advisor for asset management swap with Legg Mason. And that was really the epicenter of Legg from Baltimore down to DC. So I went down there in a management position, started running offices for Smith Barney and Morgan within the greater DC market. 2013 came along and Jim Gould and Hy Supporter, the co-founders of the firm, were looking to do something a little bit different in the industry. And they approached me with an idea of helping them build it. And so the idea was from Albany, New York down to Washington, D.C. and New York City to Boston, where either myself or Jim Gould or Hy had worked and lived in those communities, knew the advisors. We wanted to put something different together called Steward Partners. It was the idea of being a good steward and being a partner to each other. One of the things that I appreciate my time with the wirehouse firms, I certainly helped mold me and develop me into what I am today. But I also was looking for something different. And I called it being sick and tired of being sick and tired of working for a shareholder. So we created a firm where everybody is a shareholder. And that's one of the hallmarks of Seward Partners, which is everybody's an equity owner at the firm. Aligned in the growth and culture of building this forward together.

Yeah. And I mean, given your background, it seems that you were in a unique or ideal position really to understand the desires of advisors. I mean, you were in the trenches with them, so you really understood what motivates them, what concerns them, et cetera.

Yeah. And that, that really, I'd say the same is true when I look at Jim Gould, our CEO, and a lot of the divisional presidents and people that support the firm. What we did coming into the independent RIA space was a little bit different. What we were doing is trying to find a bridge to independence for wirehouse advisors who thought maybe that was just a bridge too far to be a 1099 on their own. So we developed a true fully supported independent model, plug and play, but with the unique opportunity to still own your business and have ownership in the company.

Right, and for them to keep their identity of what made them unique, different. So that would obviously be very powerful and help keep them on board, I would assume.

Yeah, I think that's a big part of it. You know, as we've grown, our equity value has grown. We have a profit sharing distribution that happens for all partners in between as well. And I'd say the other thing that we're really proud of is, you know, we started with an idea, but it continues to evolve. And so we've been very adaptable. What started out as just a W-2-only option really transformed into today us having our own broker-dealer. We have 4 very strong custodial partners: Raymond James, we've been with since day 1, Pershing Bank New York, Fidelity, and Schwab. And so we continue to expand the offering. And then one of the big, big things that changed for us about 2 years ago is we acquired our first firm and jumped into this M&A space, which is what we'll talk more about today.

Okay. And before we jump into that, I was curious, I mean, what's interesting is you were in Albany, you saw different parts of the Northeast at least. And I know some of this is a while back, so some things may have changed, but can you speak to any, I don't know, geographical differences or curiosities or things that you observed culturally or otherwise?

It's an interesting question. You know, as I, and I still travel quite a bit up and down the East Coast. I live in Tampa these days, so I keep migrating south and about as far as I'm gonna go now. But one of the things that I do think that shifted quite a bit, and I'd say this goes back to COVID, is we've seen the Southeast really expand quite a bit more for obvious reasons. You know, the Northeast is still a very, very strong market. But, you know, the idea of somebody being in Florida for 7 months out of the year, for example, or maybe it's the Carolinas or Georgia, has really changed, I think, the landscape of the business a bit. And you're seeing, obviously, not only are the advisors shifting down, but so is the wealth.

Yes, absolutely. Okay, so why don't we talk about the sell-and-stay M&A deals?

Sure.

I assume most, Many, if not most listeners are aware of this, but maybe just break it down to be for those who might not be aware of this. Can you just describe the phenomenon first of all, and then we can delve into it?

Yeah, and I'll back into, you know, what most people think of as M&A is the opposite of that, that you're selling the book and you're gonna leave. And, you know, I would say what's interesting that flows into that, you look at the average age of an advisor, it's about 60, 62. And if you asked me 2 years ago, the average age of somebody entering into an M&A deal, I would've said maybe 64, but the reality is for us, it's about 46.

Wow.

And so that is a very big, big shift in what we expected. And so sell and stay, all that is, is it's really the opportunity for somebody to, monetize their business today. And one of the things that we're seeing, and I think goes back to the shifting of the industry over the past 15 to 20 years, when I started at Merrill Lynch in '93, everybody was wearing a blue suit and a white shirt, and you were with Merrill Lynch or Morgan Stanley or Smith Barney, the big four firms, but there were a lot more of them back then, and that dominated the industry. Today, there are more RIAs out there than there are advisors in the wirehouse side of the equation. And what we're finding is it's not really the breakaway advisors that are looking for the sell-and-stay model. Somewhere along the way, it's really become the people that broke away 10 years ago, 15 years ago, have built their own independent model. And where they are right now is at a crossroads of, scaling and growing the business. And it's the same things that have always been the biggest constraints in the business, at least financially, is keeping up with technology. I think compliance and risk and also benefits, right? There's a human capital cost that goes into that. So a W-2 model, historically, it's about how much you can make. In a 1099 model, it's become how much do you actually keep? And if you want to scale and grow, you have to have investments in all three of those things I just mentioned. And that also takes you away from what you came into the business to want to do anyway, which is take care of clients and service them and go get more of them. So the things that we offer in a sell and stay model is really, I'd start with operational relief. There's certainly a, very big financial impact. And that's not just the money up front, but it's the equity that you get in our company as well. And I can talk about that. And I think the third thing is really getting back to growth.

And I mean, advisors get into the business to serve clients. And then often as they grow their firm, they're spending less and less time actually working with clients and more and more things with administrative and everything else that goes with the job.

Yeah. And I think there was a recent study that was out there our marketing team had just picked it up and it surveyed, I forget how many advisors, but 71% were stressed and overstressed.

Yeah, I mean, there are a lot of studies out there that indicate that.

Yeah, and I think the bottom line is, you know, that operational relief takes so much of it away. I can't tell you how many times I'll be in a recruiting conversation with somebody And it surprises me how people just aren't sure how long they even want to be in the business anymore. And it's not that they don't love serving the clients, they just can't stand doing the rest of it. So there's a fatigue out there.

Yeah, no, I hear you. I'm curious about something. So if we acknowledge that this trend is manifesting itself with advisors at an earlier age than in years past, has this been a gradual decline in age or was, let's say, was COVID, for example, given when it occurred, did that something that flipped the equation and made it skew much more earlier? I mean, we're just, or was it even perhaps just that the market's done so well that AUM just really blossomed perhaps more than people thought? And then they said, oh gee, I'm in a much better place than I realized. And maybe I don't need to do this for another 20 years. Maybe I could get outta here sooner. Or is it a combination of things? I'm just curious about what, to the extent you can answer that maybe.

Well, I was gonna say, I think my answer is yes, because I really do think it's a combination. For everybody, it's something different. But what's happened in the M&A space, PE money and outside investors really had not been part of this space since maybe going back to 2013 timeframe. And now it's, you can't pick up a news industry article anywhere without reading something about it. So I think there's a combination of all these things you just talked about, but the multiples are there. So when you take a look at a traditional recruiting deal at any firm, a wirehouse firm, Steward Partners, you're talking about an opportunity to monetize anywhere from 200% to 400% of your T12 revenue, which is a pretty good deal. And then it's taxed as ordinary income, and then you're tied to that note for 10 years and all the other stuff that comes with it. It's still a very good deal. And that's still one of the things that we offer at Steward. Along with equity and you can own your book. On the M&A side, the economics, advisors are now getting something equivalent to anywhere from low-end 6 times EBITDA up to 10 or 12. And so the dynamical or dynamic difference there is that upfront day 1, you're looking at something that's gonna feel like 400 to 500% of your T12 or 4 to 5 times revenue is how it breaks down. And over earnout period and maybe some growth phases after years 3 and 4 and into 5, you could be looking at deals that are 5 to 7 times revenue. So they're very impactful from a financial perspective. And oftentimes what you're seeing out there is not only you're acquiring that book, so you have treatment as personal goodwill, and the majority of that transaction becomes—

Model portfolios have evolved from a one-size-fits-all solution In a recent roundtable conversation, Jeffrey Safe of BlackRock and Alessio DeLongis of Invesco break down what's driving the next model moment, discussing how a deeper level of customization is producing a better alignment with investor goals and creating a practice differentiator for financial advisors.

Tax-advantaged.

This whole dynamic is the sell-and-stay dynamic is, I mean, it has a lot to recommend. I mean, you get the stability, the client relationship is not severed suddenly. There's so much visibility. It's a slow-motion exit. And maybe I'm missing something, but it's hard to find really fault with it conceptually. I'm sure there are issues, but what would you say are some of the concerns or things that people might be missing? Because it does seem the evidence suggests this is a great thing. And maybe it's such— it resonates with so many people. That's why it might be partly skewing younger. I don't know.

Well, I think it goes back to, you know, just where are you? And again, our idea in doing this is let's make sure we're solving the problems that are in front of you as an advisor. And for some people it's the operational relief. When you take a look at the financial side of it and the tax implications or the lower tax implications, I should say, it's really hard to beat that math over a 10-year timeframe. Now, the one thing that does happen is typically you're gonna have a higher payout in a W-2 or 1099 model, where the M&A model, that's gonna be, I think industry average is probably somewhere around 25 to 30%. So you're gonna get a lower commission payout, but you've also had the benefit of that money up front. There's not a note tied to it. You have the flexibility. Listen, if you wanna work for 3 years or 5 years, nobody's pushing out the door. We still want people to serve those clients. But it does give you the ability— perhaps you've been managing your own portfolios for all these years. We have an outlet to take that over. We've scaled up marketing and media, so you have an outlet where you don't have to do all of that. We're going to provide some turnkey solutions for you. The service model, the same thing. So I think it really, it really does have a lot to do with where you are. But when you put all of those pieces of the equation together, It's difficult to beat. The number one thing that I think people struggle with though is the emotions of it. Selling your book can be really hard to do.

It's a slow motion goodbye to your baby, so to speak.

Yeah, it really is. And one of the things that we've put into that is every deal with our firm is gonna be a cash deal, but there's also a big equity portion. So part of that is, listen, you don't have to give up wealth creation. You don't have to give up owning something. You're exchanging it for a different form.

And I'd imagine, I mean, tell me if this is the case, that some advisors who do this to lighten up the load, if you want, just to get a lot of things off their plate, might suddenly feel energized and say, oh boy, like they don't, they might be really, the stress will leave and they almost have like a new surge of energy or whatnot.

Yeah, that's absolutely true. I think knowing that you have options, that just takes a lot of weight off your shoulders. I had one of these conversations last night with one of our own advisors. And so for advisors that have been with us for the duration of their term or their note, they have the option and ability to take a look at selling their book internally to the firm as well. We were going through just those conversations. When we were looking at that G2 and G3 generation, his younger partner behind him, one of the things that we talked about is the continuity, number one, of being able to transition that book and keep it with that team. But the other thing is, listen, we are acquiring books of business for people that are 60, 62, 64, or people that do want to leave in the next 2 to 4 years. And we also need an outlet and we need to build a base to support that. So we're building a small army of next-gen advisors to support that. And I think that's important as well. So if you're an advisor selling your business, the monetization piece is really critical, but you wanna make sure your clients are taken care of.

Right, and G2, G3 often don't, can't afford it. They don't have the money, so it means—

They just don't.

Yeah, yeah.

Yeah, they just don't. And what we do, and I think you're seeing this more and more, but what we'll do is there's obviously a big financial benefit for that senior leader on the team when they're exiting or selling the practice. But there are, we put in, you know, growth hurdles and awards that extend into years 3, 4, 5, and beyond. So we always wanna make sure there's a carrot for them. And that they feel like there's a place for them to build their own equity ownership and wealth over time as well.

Okay. And tell me, tell me just a little more about how this actually often plays out with G2, G3. Does it tend to go smoothly or what are some hiccups? Or I'm just curious if you could unpack that dynamic a little more.

It's like anything else that starts with communication at top. And so I think if you have a really well-aligned team, And that communication is in place. Generally that conversation goes really well and those transitions go very, very well, seamless almost. And I think it's really just about making sure that you're on the same page. So anytime if you're thinking about selling your business, you wanna make sure that you've had that succession discussion with your team. Hitting them outta left field is, sometimes gonna go backwards for you a little bit. So I think it's really just making sure that you've had those planning conversations within your team, that you're on the same page and you're looking at what's forward.

Yeah, I mean, I think that that visibility path, if you will, is just so important to people, especially younger people. I mean, you even see so many younger people enter the profession and quit in a relatively short amount. And often one thing you often hear is that, Maybe there's not enough of a career path or too much is left in the unknown. So I think, yeah, to the extent that transparency and a path forward, if you will, is there, it can only help.

It really does. And I think one of the reasons you're seeing firms like Stewart emerge here is having that deeper infrastructure and a deeper path to work within. It doesn't have to be growth or, succession just from the person that you've been working with. We're going to be bringing other books of business into this, and we have our own people. Like I said, we're 300 advisors strong at the moment and growing. And listen, we have our own people that are looking at retirement options and succession planning. So all of this really does start to come together.

Excellent. Well, we're just about out of time. Is there anything else you'd like to add? Any final words?

This business has transformed very, very quickly. It's amazing to me the speed of change in which we're operating at. And for people that are out there thinking about what the best path forward is, the good news is there are a lot of options and firms like Stewart are there to provide that infrastructure support and not take away the identity of what you've built and your own legacy. And I think that's something that you want to consider when you're looking for a partner as well.

Great. Well, thank you so much for joining and discussing this important topic. It's been a total pleasure.

Thank you. Appreciate it, Greg.

Most welcome. My guest has been Jeff Gagno. For more podcasts and the latest wealth management news, visit barons.com/advisor, and please check out The Way Forward: Next Generation, a new podcast hosted by Allison Tucci that puts the spotlight on the emerging leaders who are shaping the future of financial advice. For The Way Forward, I'm Greg Bartolis.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.