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January 01, 2009 at 02:00 AM
Why Move?
Recruiting packages are still quite attractive. I have had advisers tell me that they really did not want to move, but if they did not move they would feel abused, taken advantage of.
Think of it this way. You are a loyal long-term adviser generating, as an example, $2 million in revenues at a 40 percent payout. You make $800,000 a year.
In the next office there’s a new recruit who also does $2 million in revenues a year. That new adviser negotiated an extra expense allowance, minimum staff support, but most of all he received a large recruiting package.
The new adviser may easily have received a $3 million loan up front, to be paid down over 9 years with incentive payments from the firm equal to the amortization payments on the loan.
If the new adviser is terminated without cause he keeps all the cash. In addition, the new adviser might receive cash and stock equal to another $ 1 million for doing no more that reaching historic revenues and assets.
So if the new and the existing adviser each generate $2 million dollars in revenues in future years, and payout stays at 40 percent, the new adviser in effect will make $1,244,000 a year versus the long-term adviser who will make $800,000. In other words, the new adviser makes 55 percent more on the same production.
What’s more, if the general market continues to have troubles, and both advisers, through no fault of their own see their revenue fall 50 percent , the $3 million non-contingent amount pays the new adviser $333,000 a year before any production, or 37.5 percent of his or her historic income, and with payout on the reduced revenues the new adviser makes $733,000 (almost as much as he or she made historically on half the revenue) versus $400,000 for the long term loyal employee adviser, assuming payout is still 40 percent.
It’s easy to see why the economics look compelling on paper. So even if the front end of the package used in the example were cut to $2 million or $2.3 million, the attraction is still apparent.
Moving for Other Reasons
These can be problems at their current firms, adverse publicity upsetting clients, cultural changes, for better access to syndicate product, more flexibility in pricing products and services, better pricing on debt, collars or other products or services for clients, stronger brand recognition, bad relations with a manager or any number of issues.
