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RFG Advisory featured on How a PE-backed RIA launched an equity swap program for advisors

February 7, 2024

RFG Advisory President, Shannon Spotswood & Chief Investment Office, Rick Wedell, were interviewed by Citywire’s Andrew Foerch. View Original article here.

How a PE-backed RIA launched an equity swap program for advisors

RFG Advisory Group is using the proceeds from its private equity deal to invest in advisors on its platform.

With a fresh lump of cash on its balance sheet, RFG Advisory has begun investing in advisors on its platform through equity swap deals.

RFG is a hybrid platform for independent advisors where advisors join as 1099 contractors and pay an AUMbased platform fee for operational support services, marketing and branding, technology and investment management. The Birmingham, Ala.-based firm sold a minority stake to private equity firm Long Ridge Equity Partners in September of 2023 in its first outside capital raise.

RFG chief investment officer Rick Wedell said that money has been earmarked to fund growth for RFG in two ways. First, it will help fund the cash portion of equity swap deals with advisors on RFG’s platform. Second, it will allow the firm to ‘invest in our corporate team as we continue to add talent to the platform,’ Wedell said.

There is no particular amount of capital that is allocated to any one initiative, but Wedell said that ‘over time our expectation is that the lion’s share of the capital they invested will go towards investments in our advisors.

Wedell said RFG’s swap deals are not shaped with a ‘cookie cutter approach’ — each is crafted case-by-case based on the partner firm’s needs. RFG generally looks to acquire an override of 2% to 10% of the target firm’s revenue at a starting rate of 6x, though that revenue multiple can go higher based on the practice’s size, he said. The program is aimed at advisors on RFG’s platform — or independent advisors interested in joining it — with between $50m and $300m in assets under management, though those goalposts are flexible.

While some of the payout can come in cash, RFG requires sellers take a decent portion in RFG equity.

‘We believe that there’s value in the alignment of incentives,’ Wedell said, noting that the split between cash and equity in any given deal is ‘whiteboard open.’

Equity in this case takes the form of incentive units in RFG, effectively stock options with a bonus payment tied to the exit. That way, stakeholders see the full benefit of the equity’s appreciation without the most burdensome tax liabilities, Wedell said.

Monetization of the units held by advisors is tied to a future monetization event for RFG. ‘Ultimately, we are looking for our advisors to be tied to our future as opposed to just: “Hey, I’m going to pull the ripcord now because I think RFG has top-ticked its price point,’ Wedell said.

RFG currently counts more than 100 advisors on its platform across 15 states. Those advisors oversee a combined $4bn in total client assets.

‘We believe that advisors should own their own practices, and we believe in the power of the entrepreneur to be able to build and drive businesses. We don’t want to take that away from anybody. But we do think that partnership, in a lot of ways, makes a lot of sense,’ Wedell said.

Something different

Wedell explained that the program is the culmination of an effort by RFG’s leadership to design a different solution than what he called ‘predatory’ forgivable loan programs offered by many of RFG’s competitors.

‘Every single forgivable loan program that I’ve seen has about a 20% cost of capital baked into it. The advisor doesn’t see it because it’s in the pricing model, right? They don’t expressly give you a finance charge but when you actually back out all the numbers, it’s built into the pricing: 20% a year for that money, which is horrendously expensive,’ he said.

Added RFG president Shannon Spotswood: ‘We just couldn’t wrap our brains around how that was in the best interest for the advisor. You’re giving something up that is very valuable and should be an appreciating asset to solve, really, a short-term cash problem.’

Prior to Long Ridge’s investment, if a partner needed financing for whatever reason, be it succession planning or just a working capital bridge, RFG would introduce them to a bank. The company still offers advisors an amortizing loan program through a local banking partner that comes with ‘relatively low interest rates’ and ‘without a lot of headaches,’ according to Wedell.

‘When Long Ridge got here, we were like, “alright, let’s think about expanding that,”’ he added.

The firm wasted little time. The Long Ridge deal closed on September 15, 2023, and RFG launched the equity swap program for advisors in November.

And while the firm has only executed ‘a couple’ swap deals with advisors to date, according to Wedell, Spotswood said the launch has drummed up ‘a lot of interest.’ She said about 30% of the program’s current pipeline is advisors new to RFG who would be affiliating with the company for the first time.

‘We want to be in a position of putting our money where our mouth is,’ Wedell said. ‘I’m going to pay you an above market multiple for your equity when you’re joining the platform. I’m going to pay you a very decent slug because I believe in you and I believe in us, and I believe that together we’re going to grow very rapidly.’