Professional Decisions: Key Terms in Retention/Recruiting Packages

More than Money: Critical Terms in Retention/Recruiting Packages

A number of times in the past, including in the recent Merrill/Bank of America transaction, I have been called upon to represent large groups of advisers jointly in the negotiation of retention arrangements. In addition, I have represented hundreds top advisers over the years negotiating recruiting packages related to changing firms or leaving to start their own firms.

While the economics of switching firms are very important, other contract terms can be the most critical. In this article, we highlight a few of the most common and most critical issues.

1.) A Free Look or a Free Offer?

A traditional component of recruiting or retention packages is a loan, in the past often structured with forgiveness over time, but today more often, for tax reasons, structured as a loan with a separate agreement providing for series of bonus payments. You get the loan up front, and pay it off over time, and receive bonus payments that would be used to make the loan payments (although the bonus will have tax withholding, while the loan amortization still must be paid in full). If at any point you are no longer with the firm the loan is due and payable in full, and the bonus payments stop.

The amount paid in a retention or recruiting deal is generally based on your trailing 12 months of revenues. As we all know, an adviser’s revenues can fall through no fault or lack of effort of the adviser. If an adviser on recruiting or retention deal had their revenues fall significantly, the bonus payment could make them a loss center.

Almost every contract in the industry makes the adviser terminable at will, with or without cause. Obviously, there would be a great incentive to terminate an adviser losing a firm money, or to pressure them to renegotiate their deal. The adviser thought they had a recruiting bonus, the adviser did not realize it was an earn out, or a “free look.”

This is where “cause” protection becomes critical. The cause provisions have many variations of structure and language, but in general provide that if you are terminated without ’cause’ you would receive the balance of the unpaid bonus payments, the loan would be paid and the after tax benefit of the deal would be obtained all at once.

The definition of cause must be reviewed and negotiated carefully. The point is not to obtain a windfall, it is to make sure the firm would not terminate you without very good reason, just because the deal is no longer economic.

2.) The Ability to Enforce Your Rights.

Rights are no good if you can not effectively enforce them. Many firms will have a loan document that provides that if they sue to collect the loan they get attorney’s fees. The loan may even come from an affiliate other than the broker-dealer and provide they can sue in court to collect in a place that is inconvenient for you.

The documents may also contain onerous restrictive covenants, and may provide that you agree upon any violation they can get a restraining order or injunction against you, sometimes agreeing that they can do so in court in a distant pro-employer state, and that you agree to pay all their attorney’s fees and costs if they obtain an order or injunction.

However, there is often nothing that says if you sue them, in arbitration or otherwise, and you prevail, that you get attorney’s fees and costs.

If possible, the objective is to make sure you do not have to litigate in inhospitable forums make sure that if you prevailed in any action, you would be granted attorneys fees and costs.