Advisors weigh sunset deals vs selling independent firms

More than 100,000 advisors who manage nearly $15 trillion in client assets are expected to decide in coming years whether to accept an internal ‘‘sunset’’ succession plan at their brokerage or leave to sell an independent advisory firm. The two paths differ in timing, tax treatment, valuation and operational risk.

Sunset agreements let a founder transfer their book to colleagues at the same brokerage. Firms typically apply a formula that pays the founder over several years as ordinary income while the brokerage names the successor. Jeff Nash, CEO of Bridgemark Strategies, described staying in the firm and taking a sunset as “the easy button” for advisors who want a simpler process and no client account migrations.

Selling an independent registered investment advisory practice usually allows the founder to negotiate price and terms and to receive proceeds taxed as capital gains. Bridgemark’s report notes that independent sales have produced substantially higher multiples than sunset formulas, but the seller must retain clients, find buyers and manage transition logistics.

The report offers a hypothetical example. A team with $4 million in trailing 12-month revenue might receive about 250% of revenue under a sunset formula — roughly $10 million paid over five to 12 years as ordinary income. An independent sale of that same practice could yield between $16 million and $24 million, with a faster payout and capital gains treatment. Those outcomes depend on how many clients follow the advisor and the buyer’s willingness to assume integration risk.

Sunset deals generally deliver lower valuation multiples, slower payouts and ordinary-income tax treatment. Independent sales typically pay faster and may qualify for capital gains treatment, while placing the burden of client retention and operational transition on the seller and buyer.

Market changes are affecting the trade-offs. Mitchell Fenimore, senior vice president at River Wealth Advisors, noted that custodians have developed account-transfer technology to reduce migration headaches. Independent firms are offering more flexible deal structures to recruit teams, while wirehouses and employee brokerages have increased sunset packages and retention efforts.

Jason Diamond, president of Diamond Consultants, observed that some successors accept a client base inside a brokerage and later open independent practices, which can make a sunset’s immediate operational ease temporary.

Bridgemark’s report recommends advisors obtain an independent valuation, estimate how many clients would follow them to an independent firm, and get any sunset formula, payment schedule, tax treatment and financing source in writing. The report also advises thorough due diligence on potential buyers or internal successors and modeling outcomes with clear assumptions.

The report states both paths are legitimate but operate on different timelines, tax regimes, risk assumptions and ownership outcomes. Advisors approaching retirement must weigh the certainty and logistical simplicity of a sunset against the potential for higher proceeds and more control from an independent sale.