For advisors pondering a move from a wirehouse to an independent broker/dealer with visions of large, forgivable transition loans dancing in their heads, it’s time for a reality check.
That’s because, as an esteemed economist famously said, there’s no such thing as a free lunch! With reps at independent B/D reps earning 90% payouts, independent firms have much smaller margins to work with than do their wirehouse counterparts.
Times have certainly changed when it comes to a broker’s transfer options. It was once common for reps joining a firm to be responsible for covering all their own expenses, including registration costs, business cards, stationery and ACAT transfer fees. While some firms still take that approach, the trend in recent years has evolved to where firms worry that if they don’t offer something to brokers contemplating a switch, they won’t be able to compete.
In spite of their thin margins, more and more independent firms are becoming increasingly aggressive with their transition packages as way of competing in a highly competitive marketplace. But don’t deceive yourselves: the sky is definitely not the limit.
So to inject a note of sanity into these proceedings, here is a comprehensive summary of transition money options now being offered advisors by independent broker/dealers.
Offer No. 1: 2% to 3% of Trailing 12-Month Production
A majority of broker/dealers find this offer fair and equitable for both sides. Money is offered at the time of placement with no strings attached. In the case of large producers, firms may cover ACAT transfer fees in addition to two to three percent support. Firms are comfortable with this option because it’s a reasonable hit for their profit spreads, and covers most advisors’ transition expenses, but not their downtime or new-office expenses.
Offer No. 2: Accelerated Payouts Up to 100% for Up to a Year
A less common option we’ve been seeing are firms offering 100% payouts for three months to a year. The motive here for broker/dealers is to help reps recoup transition expenses and lost revenue due to downtime.
Broker/dealers using this approach don’t have to bother with forgivable notes or making capital commitments on their end. A few firms are offering combinations of forgivable loans of up to 10% along with accelerated payouts. When wirehouse representatives are transferring, the reps’ ability to transfer their books can run into problems, either through contractual restrictions or a manager allowing in-house reps to go after the accounts being transferred.
For independent broker/dealers in these situations, accelerated payouts may make more sense than upfront money, since the latter requires production to be maintained at or near a rep’s prior-year level. Though this option has a lot going for it, reps usually prefer receiving money at the time of placement, or a combination of upfront money and accelerated payouts.
Offer No. 3: Upfront Loans Paid Back Through a Lower Payout