Wirehouse Recruiting Packages: No Smoke and Mirrors

These 250-350% deals may include lofty goals, but the parameters are clear upfront

A recent trade magazine article asserted that large wirehouse recruiting packages are in essence, little more than a nefarious scam.  

As the author tells it, brokers are lured to competing wirehouses with promises of 300% to 350% packages that require achieving unattainable asset and production goals.

Instead, these advisors find that they need to boost their gross, because they’re on the hook for big tax liabilities. 

In this rope-a-dope-type hustle, hapless advisors are bamboozled into signing multi year contracts for the same amount of money that they could formerly have gotten in half as many years.

In other words, some of the largest and most savvy teams that moved in the last two years were duped by heartless wirehouse executives. Who knew?

Most hiring authorities in the independent and RIA space understand how tough it is to compete with the big money that the wirehouses are paying.They usually don’t claim that there’s any flaw in the deals themselves.

In 2010, Cerulli estimated that 40% of wirehouse advisors who jumped ship ,joined other wirehouses. And only 14% signed up with independent broker dealers or RIA’s, while 22% joined regionals, and 18% joined banks.

In our experience, the lion’s share of wirehouse brokers who opted for independence were producing less than $500,000.  As such, they were unencumbered by retention awards ranging from 30% to 75% of trailing 12 months gross production.  

The greater the production, the more likely that the advisor would move to another wirehouse.  The major wirehouses claimed that “regretted attrition” amongst   top advisors and advisor teams was less than 5% last year.

More wirehouse advisors are considering independence. But as we’ve written before, the California Gold Rush this is not.

The wirehouse share of the advisor marketplace may shrink, but they’ll always be the 800-pound gorilla in the room.

Brokers like their winning combination of turnkey environment, household name, lots of capital, cutting edge platform and big signing bonus.

It’s little more than wishful thinking when senior staff at independent firms repeat tired mantras like “the wirehouse model is broken”.

Let’s look at how the deals themselves are crafted.

Upfront payments range from 100% to 140% of trailing 12 month’s gross production. Advisors are  typically  required to do 70% of their on board trailing 12 month’s gross production and bring over 70% of client assets in year one,  90% the second year and 110% the third year. 

Any advisor with a reasonably solid franchise should have no difficulty achieving these goals. 

It’s well known that most advisors bring 80% or more of their assets to their new firm during their first year. That’s why the firms pay the big bucks!

Advisors who achieve these goals are rewarded with packages totaling 250%.  

The process is self selecting.  Only advisors who are confident in their ability to achieve these goals “hit the bid” elsewhere with these deals.

The 330% to 350% packages require advisors to increase both assets and production by 50% within the first five years. 

These are lofty goals, perhaps not achievable by most advisors-especially those who are already producing at mega levels. But these parameters are spelled out clearly in trade magazine articles and pre hire letters so, there’s no surprise here. 

Most advisors who take one of these deals are confident in their ability to earn a 250% package, but  are not counting on a 330% plus package. We are careful to make this distinction with every advisor with whom we work.

Are deals eaten up by taxes?

If an advisor grossed $1 million and got 100% upfront over 10 years, he would pay taxes on an additional $100,000 per year. (One of the silver linings of the long contracts is the lower tax burden per year.) 

Assuming the advisors production dropped in year one to 70% of on board gross-$700,000, he would still receive a back end bonus of 25% to 40% depending on the firm.  

There’s plenty left over to pay the taxes as long as the advisor hits the  back ends.

More advisors in the coming years will choose independence. But it’s best to attract them by showcasing the many   benefits of independence. 

Claiming that wirehouse recruiting packages are another version of three-card monte is the wrong approach.

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