Break up Wells Fargo? OK, but what are its advisers worth?

Deal-making in the wealth management industry continues to pop with this week's announcement that two big registered investment advisers, The Tiedemann Group and Alvarium Investments Ltd., will merge. The two have reached an agreement to combine with Cartesian Growth Corp. to form a new firm.

The catch? It will be listed on Nasdaq as Cartesian in the form of a special purpose acquisition company with the ticker symbol GLBL.

That's some pretty nifty dealmaking for RIAs to go public via SPAC, which has been a favorite investment vehicle during the Covid-19 pandemic. The new firm, Alvarium Tiedemann Holdings, will have a combined $54 billion in assets under management. The companies are anticipating a market capitalization of almost $1.4 billion.

That deal led me to wonder how much Wells Fargo Advisors could eventually fetch on the market, given private and public markets demand for wealth managers, along with Sen. Elizabeth Warren recently urging the Federal Reserve to break up Wells Fargo & Co. -- the Massachusetts Democrat was unhappy that the bank was handed a fresh regulatory action and a fine of $250 million this month.

Wells Fargo's new CEO, Charlie Scharf, has already taken the chainsaw to some wealth management businesses as he works to reorganize the giant bank. It sold its asset management business this year for $2.1 billion and dropped the Abbot Downing name for managing ultra-rich clients’ money.

So, far, Wells Fargo Advisors, with 12,819 advisers, has not been meaningfully disrupted. And while I don't have any direct knowledge of a potential sale of its adviser group, Scharf and his team of corporate hackers have undoubtedly wondered what a spun-off group of prime FAs who on average produce $1.08 million in annual revenue could fetch.

Turns out, Wells Fargo Advisors could fetch plenty in a sale to private equity or another broker-dealer or dealers, according to bankers and competing executives who keep a close eye on the firm.

We used two different calculations to estimate a potential spinoff's valuation, and twice delivered similar results: a separate Wells Fargo Advisors, in this roaring market, could potentially be worth in the neighborhood of $20 billion or more.

Let's start with its 12,819 advisers who generate, on average, annual revenue of $1.08 million, according to the company. That’s $13.8 billion in annual revenue.

The first calculation is pretty simple and based on a multiple of annual revenue, while the next is a little more complex and is based on a multiple of EBITDA, or earnings before interest, taxes, depreciation and amortization.

Wealth management firms trade at multiple of revenue of 1.5 times to 2 times, executives said. Take, for example, LPL Financial. In terms of revenue, LPL Financial currently kicks off $6.6 billion to $6.7 billion per year, and LPL’s market capitalization was a shade under $11.5 billion after the market closed on Tuesday.

So, LPL shares are trading at a multiple of 1.7 times revenue. Apply that multiple to the annual revenue of Wells Fargo's advisers, and the total is $23.5 billion.

Next, compare Wells Fargo Advisors to Morgan Stanley, which is running a pre-tax margin of 27% on its wealth management business, according to its most recent quarterly report.

Then, consider that LPL paid six times EBITDA for its recent acquisition of Waddell & Reed's wealth management business.

So, let’s do some back-of-the-envelope math for Wells Fargo's 12,819 advisers.

As noted, its advisers generate $13.8 billion in annual revenue. Let’s use a 20% margin because it’s not as well run as Morgan Stanley and also has FiNet, who are independent contractor advisers and are typically a lower margin business.

So, we estimate annual pre-tax profits at Wells Fargo Advisors of $2.76 billion. And let’s slap a valuation of 8 times EBITDA on it because it’s a better business, its advisers produce much more annual revenue than Waddell & Reed, and valuations for wealth management businesses have increased in the past couple of years.

THE REAL DEAL

That makes a valuation of $22.1 billion -- truly a mega deal.

A Wells Fargo spokesperson declined to comment when asked about the valuation of Wells Fargo Advisors.

Now, here's why such a deal makes sense.

A spinoff of Wells Fargo Advisors would allow its advisers to move beyond nagging bank issues; it would also create an opportunity for Wells Fargo to add and buy wealth management businesses as opposed to cutting or consolidating them.

What's more, wealth management is a high-maintenance business often based on the personalities and desires of financial advisers, and bankers hate that type of risk.

In this market, Wells Fargo's financial advisers could be worth $22 billion or more in a potential spinoff or sale. That's a big pork chop to swallow, but I imagine there must be some big dogs, particularly private equity managers, willing to take the bite.