Wealth management is an old person’s game, with the average U.S. financial adviser currently over the age of 50. That’s a problem for banks, which need to create contingency plans for when their brokers up and retire.
Traditionally, big brokerage firms have handled the process in a rather clean and efficient way. You transition the adviser’s book of business to others within the firm (he or she usually helps with this process), and then pay them a percentage of the revenues earned over the next few years. Banks win because they keep clients from leaving; brokers win because they get paid to play golf.
Unfortunately for large brokerage houses, this model appears to be under attack. A new report from Reuters suggests that, rather than just retiring from a UBS or Merrill Lynch, brokers are taking their businesses independent and then, in due time, selling them to smaller brokerage firms, like a Raymond James, for example.
The reason is very simple: big-name advisers will make more money selling their independent business than if they retire from a large bulge bracket bank. For one, the market is out-paying the retirement offers made by big banks by roughly two-to-one, according to Reuters. Additionally, brokers who sell their businesses outright get an enormous tax break when considering the alternative.
Money earned from an adviser’s book after they retire is subject to federal, state and local income taxes, which top out a nearly 40%. Proceeds from the sale of a business, meanwhile, are subject to capital gains taxes, which reach just 20%.
Long story short, ageing brokers have another option at their disposal when considering their five-year plan. Big banks just have another problem on their hands.
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