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How Advisors Can Secure Financing

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Here’s how not to impress a banker if you’re a financial advisor seeking capital to build your business:

Don’t say your plan is to acquire another advisory firm whose clients are paying a 1% asset management fee and you’ll now double your revenue by charging them the 2% fee you’re charging your clients.

“We’re not going to write that loan…it just doesn’t make sense,” is the response of Jason Carroll, a senior loan officer at Live Oak Bank, which specializes in loans to financial advisors.

Helping advisors access capital was the subject of the first session Wednesday morning at MarketCounsel’s annual advisor gathering in Las Vegas, and the good news for advisors seeking to acquire another practice, buy out a partner, purchase their office building or finance their breakaway is that funding is readily available.

Indeed, something like 90% of the applicants Live Oak sees get funded.

“The 10% who don’t get approved are folks we do a final credit check on and find out about the bankruptcy they didn’t tell us about,” says Carroll, who boasts of a zero default rate on his bank’s advisor loan portfolio.

The Wilmington, N.C.-based bank has lent $120 million to investment advisors so far this year.

The session’s other panelist, Brinker Capital’s CFO Philip Green, also expressed optimism about advisors’ ability to raise capital, which he described as a function of simple supply and demand.

“There are 10,000 baby boomers retiring every day over the next 15 years…and a low supply [of advisors], so it’s no surprise capital is chasing financial advisors,” says Green, whose firm actively assists its advisors in financing acquisitions.

If the ease of securing financing comes as a surprise to advisors, that may be the result of a mismatch between traditional banking, which requires collateral for loans, and financial advisors, who run cash-flow based businesses.

“Banks like to lend to people who don’t need money,” says Green. “There’s a lot of capital out there but few who understand this business.”

So, for example, Green helped a Brinker-affiliated RIA with $1.5 billion in assets under management and 85 to 90 advisors secure financing for its unique advisor succession model.

The firm hires junior advisors, who will be poised to take over retiring senior advisors’ books of business. The firm successfully financed a round of such transitions but lacked the capital to repeat the process.

“Banks are notoriously bad at lending to cash-based businesses,” Green says, though he says they are the lowest-cost loan provider and should be an advisor’s first stop in the process of seeking capital.

The continuum of capital sources after bank debt extends to strategic capital (“which is a little more expensive, in the 6-7-8% range,” Green says), to mezzanine finance (which focuses on one-time opportunities) to private equity (which seeks recurring opportunities and may charge 25%-plus and seek control of the firm) to venture capital (which can come with 30% rates and targets startups).

As one ascends this financing food chain, the tranches of available capital are generally larger, thus matching the higher rates and higher risk of the enterprise.

Brinker’s Green praised Live Oak, a niche bank he placed somewhere between ordinary bank debt and strategic capital in his schemata.

Indeed, Carroll confirmed that Live Oak charges prime rate plus 2% or 3%, with loans today generally around 5.25%.

“$1 million to $5 million is where we play,” he said, emphasizing “we’re a cash-flow lending entity; we don’t require collateral.” Carroll adds that Live Oak is the only bank in the country whose charter puts that in writing.

Green is seeing many of his RIAs acquiring strategic capital at about 6% to 7%, with a promissory note for four years, interest paid quarterly and a balloon at the end. The loans are paid with cash flow, he adds.

So how do advisors obtain such loans?

Green says advisors need both a strategic plan and to understand their balance sheets. Most advisors, he says, meet those requirements but what they fail to do is “merge those two plans so that you can show you can sustain and replicate cash flow.”

A lender wants to know they are funding “a repeatable model,” he adds.

Another consideration:

“Lenders like entrepreneurs who have failed at least once,” says Green.

The Brinker Capital CFO also offered this practical advice:

“If you’re going to want capital in the future, go out now before you need it; find your story and your modeling. Then when you do need it, you have your model and your story down.”

— Check out More Advisor Audits Needed—Only Not From SEC: Pitt, Schweiss on ThinkAdvisor.


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