Advisors are on the move. The conditions are perfect -- which is another way of saying the six-year-run of notching record gains in the stock market may be coming to an end.
Despite years of sky-high recruiting packages, advisors have been hesitant to move. Making money in a market that has returned nearly 200% since the lows of 2009 has been relatively easy.
Plus, firms have been handing out retention bonuses to keep everyone right where they are.
In such a good business environment, why move?
2015 could be different. The S&P 500 is down about 2% this month, and volatility -- long dormant -- is roaring back.
Anyone with even a shiver of discomfort at their current firm has every reason to at least take a look at what cross-town rivals have to offer. Odds are good that advisor pay, based on trailing 12-month commissions, is peaking. That means recruiting packages won’t get any better than they are today.
It's advantageous for advisors to move when business is strong. Moreover, investors are likely to have had a positive experience with their advisors in these rising markets and are therefore easier to shift to new firms.
Advisors are well aware that clients have notoriously short memories. Once the market turns, just a few months of poor performance can sour them. So right now, the rewards for moving are the greatest, while the downside risks are at a minimum.
The surge in market volatility is alarming many advisors.
The market began the year with five consecutive down days, dropping 4%. That's the worst start to any year since 2008. There's a pervasive feeling of unease amongst both advisors and investors. Many view recent market gains as unsustainable, propelled by low interest rates rather than solid corporate earnings.
The Federal Reserve is promising rate hikes in the not-too-distant future. And there are concerns about a potential global slowdown.
Volatile markets are emotionally draining for both advisors and clients. Advisors often spend a huge chunk of time reassuring clients and dissuading them from making rash decisions that aren't in their long-term interest.
The prospect of a more difficult year ahead, in which trailing 12 numbers may not continue to move up, increases the attractiveness of signing bonuses for reps. Generous recruiting packages can be a welcome cash cushion to advisors in difficult market environments.
Wirehouse retention deals rolled out in January 2010 are expiring soon. Technically, many amortize (or end) by 2019. The awards ranged from 30% to 75% of the previous year's gross production. One-ninth of the deal is forgiven each year.
If advisors worry about how their firms will be able to support them in a weak market, they may feel freer to walk away from the awards than they did just two years ago.
The math is simple. Every year, they owe less to their current firm if they move. Advisors who wish to jump ship today are a better position to do so than they were a few years back.
This is especially true for those advisors who are planning to go independent. Independent broker-dealers typically offer recruiting packages that are a lot less than those offered by the major wirehouses and the regional firms.
Upfront money is usually anywhere from 10% to 40% at independent broker-dealers vs 100% to 150% in the wirehouse channel. Many wirehouse advisors who'd like to go independent simply can't afford to do so until most of their retention awards have amortized.
Changes in Payouts; Tech Shortfalls
Two major wirehouses -- Morgan Stanley and UBS -- have opted to cut the cash portion of their grids and to defer more of their advisor compensation. Meanwhile, there are strategic changes afoot at some of wirehouses as they emphasize banking services, a controversial move.
Some smaller independent broker-dealers are falling behind in the breadth of their technology and in their platform capabilities. This trend, along with others, may prompt some independent advisors to opt for the increasingly popular RIA or hybrid model.
The Super Independents
What's striking about today's moves is that so many involve large producers and big teams. While it's true that bigger producers can command bigger deals, that's not the main reason for this phenomenon.
Big producers are both more confident and proactive. They are typically more self-assured in their client relationships and in their ability to transport clients to the venue of their choosing. Larger producers are also serious decision-makers, who do not hesitate to change firms to rectify deficiencies in their current firm's platform or to change their business model.
In the last few years, a group of "Super Independents" has arisen, which offer intriguing opportunities exclusively to the industry's top producers. Firms like High Tower, Focus Financial, Dynasty and more recently Lebenthal have become destinations for many of these top performers.
Their business models vary, but many Super Independents offer signing bonuses and equity in varying combinations. Over time, additional Super Independents will emerge. The attraction of their unique business models will continue to fuel movement amongst advisor mega -producers.
Change is the rule in markets. What’s been striking is how steady Wall Street advisors have been post-crisis. But that’s about to change.