From the January 2009 issue of Research Magazine • Subscribe!

Why Move?

Why Move?

Recruiting packages are still quite attractive. I have had advisers tell me that they really did not want to move, but if they did not move they would feel abused, taken advantage of.

Think of it this way. You are a loyal long-term adviser generating, as an example, $2 million in revenues at a 40 percent payout. You make $800,000 a year.

In the next office there's a new recruit who also does $2 million in revenues a year. That new adviser negotiated an extra expense allowance, minimum staff support, but most of all he received a large recruiting package.

The new adviser may easily have received a $3 million loan up front, to be paid down over 9 years with incentive payments from the firm equal to the amortization payments on the loan.

If the new adviser is terminated without cause he keeps all the cash. In addition, the new adviser might receive cash and stock equal to another $ 1 million for doing no more that reaching historic revenues and assets.

So if the new and the existing adviser each generate $2 million dollars in revenues in future years, and payout stays at 40 percent, the new adviser in effect will make $1,244,000 a year versus the long-term adviser who will make $800,000. In other words, the new adviser makes 55 percent more on the same production.

What's more, if the general market continues to have troubles, and both advisers, through no fault of their own see their revenue fall 50 percent , the $3 million non-contingent amount pays the new adviser $333,000 a year before any production, or 37.5 percent of his or her historic income, and with payout on the reduced revenues the new adviser makes $733,000 (almost as much as he or she made historically on half the revenue) versus $400,000 for the long term loyal employee adviser, assuming payout is still 40 percent.

It's easy to see why the economics look compelling on paper. So even if the front end of the package used in the example were cut to $2 million or $2.3 million, the attraction is still apparent.

Moving for Other Reasons

These can be problems at their current firms, adverse publicity upsetting clients, cultural changes, for better access to syndicate product, more flexibility in pricing products and services, better pricing on debt, collars or other products or services for clients, stronger brand recognition, bad relations with a manager or any number of issues.

Setting up your own firm may look more and more attractive. The name brand firms have been tarnished, and given all that has happened clients may see independent firms without all the conflicts and financial risks of proprietary trading more and more attractive. Controlling your own destiny and building your own equity in a business may become more attractive than ever.

The Risks of Moving

No one looking at a move should be wearing rose-colored glasses. While some things depend on the firm you are at and the one you go to, and the law of the state you are located in, there is a risk of litigation, the loss of information you will have to re-create over time, the possibility that in the future should a client arbitration arise out of matters that occurred at your old firm they will not defend you, and that the old firm will not be that cooperative if a regulatory inquiry arises over activity you were involved in at your old firm.

You may forfeit deferred compensation, you may lose some fee and commission income you were expecting in your last check, you will inevitably have loss of income as you transition clients to your new firm, you may lose some clients, the process of looking, evaluating offers and the logistics of a move will be time consuming, you may have some non-transferable assets on which you will lose some revenue and of course you may lose clients in the transition.

You may lose staff. You may find problems with overlapping adviser coverage on some clients when you arrive at the new firm, which, given privacy rules, can not be cleared in advance.

You have all probably seen what is done by the advisers at your current firm that are assigned your clients to retain for the firm. Some may disparage you, some may try to stir up complaints, say all sorts of things, and even when they are very wrong there may not be much you can do about it as a practical matter.

Since there is so much movement between the major firms it is rare to see purely vindictive actions, this can have inevitable repercussions. But a truly vindictive manager can try to cause you problems in many ways, including searching for regulatory violations to mark on your U-5 and cause a regulatory inquiry.

And no matter how much due diligence you do, there is always the problem of moving from the devil you know to the devil you don't.

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Steven Insel is a broker-dealer and investment advisor attorney at the firm of Jeffer, Mangels, Butler and Marmaro LLP in Los Angeles , where he represents many international institutions and boutique firms. He has represented hundreds of the top- producing advisers in moving between firms and setting up their own firms.

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