From the May 2010 issue of Research Magazine • Subscribe!

Sick of Recruiters

Financial Advisors Find they Can Negotiate Their Own Deals

In the Wall Street jungle, advisor headhunters could be an endangered species.

Sounds far-fetched? Just listen to one top veteran recruiter:

"The recruiting model is essentially dead on the Street. Our firm is moving aggressively away from it. It's outdated and no longer has [relevance] to what advisors are looking for." This from Eric W. Gershman, president of 30-year-old Consultants Period, Ltd. He has worked for every major brokerage and moved large teams producing as much as $500 million-plus.

Last fall Gershman founded DealMentors.com, an online resource that helps FAs negotiate their own deals without recruiters.

Indeed, at a time when advisors are, increasingly, bypassing executive search consultants -- who typically take a big chunk of the firm-switching advisor's pay package -- a mini industry is sprouting to help FAs conduct their own searches and negotiate contracts.

Much of the advisor "musical chairs" of last year has now abated. In 2009 as many as 22,000 FAs changed firms, according to Discovery Database; more than 8,000 of the total advisors in motion last year were wirehouse FAs, half of whom went to other wirehouses.

Many were big-producing teams who snagged lucrative deals and are now staying put, at least for a while. A sizeable part of today's market is in $300,000-to-$600,000 producers, according to Mark Elzweig, president of Mark Elzweig Executive Search Consultants, in New York City (see sidebar).

In addition to Gershman with his innovative web-based service, a number of securities industry attorneys not only are negotiating advisor contracts, as is traditional, but helping FAs decide on the best channel of operation and even the specific firm.

"I function as a career coach-lawyer-trusted advisor in many of my deals," says attorney Steven Eckhaus, a partner in Katten Muchin Rosenman, in New York City, where he is chair of the firm's executive employment practice. "I think of myself as a 'legal therapist'! Lots of clients come to me because they don't have anyone else they can talk to about the career issues they face. Our confidential conversations have legal privilege."

The emerging trend of advisors rejecting recruiters and dealing direct with branch managers is yet another shift triggered chiefly by the financial crisis and brokerage firm consolidation. What was once a seller's market has turned into a buyer's market. Managers are pocketing big bonuses to recruit on their own. Further, because advisors already know managers in their communities, they have little need for introductions -- a headhunter's main contractual obligation.

The upshot? Many now perceive recruiters as middlemen who add no significant value.

"Some recruiters are very experienced and probably can render good advice; but since most are working for the firm, they're not out there discouraging you [exactly] from what the managers are trying to sell you," says Steven J. Insel, a partner in law firm Jeffer, Mangels, Butler & Marmaro, in Los Angeles, and one of Wall Street's biggest deal makers.

"Do you ask a used-car salesman how good the car is -- or do you bring in a mechanic who has no conflicts of interest?" Insel remarks.

According to Gershman, who is based in Stowe, Vt., the strong trend to branch managers contacting advisors direct is unprecedented.

"It used to be so difficult to move an advisor that firms would employ recruiters to do their digging. But today there's less firm loyalty [from advisors], and managers are getting bigger bonuses to recruit. Firms are in a race for net new assets. [One] way to get them is by recruiting."

Another reason FAs are avoiding recruiters is that current deals aren't as rich as they had been, particularly the up-front signing bonus/loan portion. Moreover, today, in order to receive their total package, an advisor must deliver more.

"Deals are skinnier, so the financial advisors don't want to split them with a recruiter. We're seeing more advisors negotiating deals on their own and then coming to a lawyer for advice to help them close," says Rogge Dunn, with Dallas law firm Clouse Dunn Khoshbin. He has moved some of the industry's biggest teams.

A New Model for Doing Deals

DealMentors.com's main thrust is to help boost the offers that advisors -- typically those in the business at least five years -- have in hand. No introductions are made. The website serves up a host of information and tools to assist FAs in negotiating their own deals, including a comparative look at major pay packages from big firms like Bank of America Merrill Lynch and Morgan Stanley Smith Barney. All that comes free of charge.

But "we aren't doing DealMentors to be nice guys; we're doing this as a profitable model," says Gershman. That is, beyond the do-it-yourself means, the resource offers one-on-one consulting at $350 an hour. There is no minimum -- and there are no introductions.

"We certainly hope advisors will employ our consulting services to help negotiate their deals upward," Gershman says. "There are scores of ways to improve these offers. The biggest pitfall in the transition process is getting a sub-par deal."

DealMentors' consulting-fee structure is similar to the hourly way attorneys charge FAs for their services.

"It's incredibly stupid for an advisor to negotiate their own move. Would I go out and try to be my own dentist?" says Insel. "When you make the biggest decision of your commercial life with many, many millions of dollars involved, you shouldn't be cheap." The lawyer typically charges from $5,000 to about $25,000 per deal.

Insel, who says he acts as a career coach, prides himself on knowing "a lot of tricks" of the trade, such as making sure that no "payout haircuts" lurk and that big producers are permitted to keep their middle-market clients. As a tax expert, he knows which firms "have a lot of terrible stuff buried in their stock-option plans" too.

Customized negotiations are an Insel key strength. Once, with Mormon clients, for example, he made certain that, were they to be called away on senior missions, their vesting would be frozen rather than lost.

Another new-wave firm, MarketCounsel, in Englewood, N.J., specializes in helping advisors go independent.

"The traditional brokerage recruiting firms haven't made a significant amount of headway into the independent space. Only a handful are playing that game," insists Brian Hamburger, founder and managing member.

Usually for a fixed fee starting at around $10,000, MarketCounsel helps with all aspects of the transition process, especially the legalities of leaving the existing firm and the regulatory intricacies of setting up on one's own. These consultants have even developed discreet strategies to deal with the issue of raiding, which often crops up with the move to independence.

All in all, for advisors considering a recruiter-free transition, the best advice is: proceed with caution.

"The one big danger in brokers doing deals themselves is that confidentiality gets breached, and then their old firm fires them," Dunn says. "That happens a lot. Don't blab to people that you're looking for a new place or send out a blast e-mail or start calling brokerages: 'Do you have any openings?'"

To avoid being sued by the former firm, advisors need to follow to the letter the Protocol for Broker Recruiting, provided the BD has signed on to such an agreement. Compliance with it enables advisors to leave litigation-free. But this protection can be claimed only if FAs adhere carefully to Protocol stipulations.

"One sure way to blow everything is to solicit clients prior to leaving," Hamburger notes. "Even absent industry rules, there's the age-old common law that you owe your employer a duty of loyalty and that while you're drawing a paycheck from the firm, you're unable to go out and solicit clients adverse to the interests of that firm."

Critical, too, of course: FAs must be certain they move to a brokerage that's capable of providing "the best possible platform for clients," says Eckhaus. "They also need to be sure that the culture of the new firm is one in which they'll be comfortable, where they feel they can thrive and expand their business."

Online Dating Coming to Advisors

Some consultants believe that when deals once again fatten up, advisors will flock back to recruiters. Others, like Hamburger, take a different view:

"Technology is going to completely replace the role of the traditional recruiter because those used basically as matchmakers don't have a place anymore. Only the ones who are real career consultants will survive."

Hamburger predicts that with the information-sharing power of the Internet, advisors -- in a scenario not unlike online dating -- will send out requests for proposals, which they'll then evaluate. "The whole process will be commoditized. You used to have to know the right person to call at the right firm. That's no longer the case."

For now, Gershman continues to offer full-service recruiting services -- including introductions -- through Consultants Period, charging firms a 3 percent to 6 percent fee. But distancing himself more and more from that model, he is "looking at the advisor as our client" instead.

"We're saying there's a helluva lot more money to be made consulting to those guys than through traditional recruiting services" he notes.

The issue nowadays for Wall Street headhunters is largely one of survival of the fittest.

The best "will always be part of the landscape," says New York City-based David A. Tufts, senior managing director of Oppenheimer & Co.'s biggest office, with some 115 advisors. "Recruiters provide a service to both the advisors and the firms. Markets change, technology changes. But recruiters are salespeople, you know -- and sales people try to create transactions."

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A Recruiter's Rebuttal

"The recruiting model is far from dead!" says Mark Elzweig, president of executive search consultants Mark Elzweig Company, in New York City.

"A model that limits itself to deal negotiation sounds analogous to that of a resume-writing service: It does only part of the job but misses the larger point," says Elzweig, recruiting financial advisors for nearly 25 years.

Neither should FAs limit themselves to the career advice of an attorney, he insists. "You're depriving yourself of an important layer of due diligence to have a lawyer act as your recruiter. I've yet to speak to one who can match a seasoned recruiter's in-depth understanding of firms and where the business is headed."

Though Elzweig strongly recommends to his advisor clients that they consult a lawyer for contract review, only 20 percent do so. "They don't want to spend the money. So it's hard for me to imagine advisors signing up to explore options with attorneys that have their meters running. Do you really see advisors paying $400-plus-an-hour for career advice?"

Elzweig is paid by firms on a contingency basis -- 6 percent of the advisor's trailing 12 months -- and receives no retainers. His fee isn't taken out of the FA's pay package, he says. "Firms have separate money that they designate for recruiting. So our packages come from somewhere else."

He stresses that a professional, well-connected recruiter with in-depth knowledge of BDs' strengths and weaknesses not only makes introductions but performs myriad other functions, including quarterbacking the requisite due diligence.

As opposed to so-called pump-and-dump recruiters who introduce only, Elzweig, for one, covers all bases in helping an FA with his strategic career move. If independence is the goal, he will, for instance, assist in the decision to set up an RIA or else join an existing shop.

Another plus to using recruiters is that they position advisors as hard to get, Elzweig notes. As for the notion that FAs need no introductions because they're acquainted with local branch managers, he says: "A number of advisors that we've worked with have ended up going to firms they hadn't considered in the first place. It was a matter of listening to their needs and making an appropriate recommendation...They're often surprised with the decision they make."

He continues. "A good recruiter walks advisors through the decision-making process so they can choose the right firm" and helps ensure they're Protocol-compliant for a glitch-free transfer of client assets.

Elzweig's approach even includes arranging technology "test-drives" at firms advisors have under consideration. "Go on the computer to see what it's like to get the information you need and enter orders. It's very important to make sure you're comfortable," he says.

Good recruiters also introduce advisors to the new firm's home office managers, Elzweig notes, "to be assured that their business needs can be handled properly."

As for negotiating and maximizing the deal itself, savvy recruiters don't let FAs "waste time pushing for things they're not going to get," Elzweig says. "But they show you things you could get."

Overall, "you need to know the pros and cons going in. A very good thing to remember," he points out, "is that the Greek word, 'utopia,' means 'no place." -- J.W.R.

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