The bad news for advisers considering a move (and the good news for shareholders) is that the recruiting “bubble” we’ve experienced for the last two years has finally burst. The “front end,” or non-contingent, portion of recruiting packages being offered by the major firms has been reduced by as much as a third or more.
The bad news for advisers that did not move, and for shareholders, is that the packages were at levels that can’t seem to have been justified. Many deals were at levels of 250 percent to 300 percent of trailing 12 month revenues, with the contingent portions requiring hurdles of less than, or no more than, historic assets or revenues.
Why is this bad for advisers that did not move and for shareholders?
Fixed overhead is being allocated over a reduced and falling revenue base at most firms. The allocation of costs for contingent liabilities (e.g. client arbitrations and regulatory settlements) seems to be climbing. And logic would dictate that all these huge recruiting packages and expenses will be paid for with falling profits and cost cutting, including reduced payouts.
Those advisers not on recruiting packages might be seen, in effect, to be subsidizing those on recruiting packages in the future.
And How Did This Happen?
Cycles seem inevitable, and the pendulum swinging too far in every cycle also seems inevitable. Mass psychology is hard to fight. The projections that justify these deals were based on optimism about advisers growing revenues and transitioning business, probably well past when such optimism was justified.
When people are paid bonuses for recruiting and increasing revenues, instead of long-term profitability, perverse incentives can be created. When a firm is stealing masses of your advisers, taking advantage of opportunistic moments of adverse publicity, there is a natural human desire to fight back.
When competitors keep increasing their offers, it’s hard to walk away from the game. It became almost a joke among people involved in the process, like the lawyers, who were trying to guess how long this cycle would last.
Who’s Most Attractive?
Of course, certain firms never got involved in the war of increasing recruiting packages, or at least not at the high levels that were reached.