The last 16 months have seen an unprecedented volatility in the market for financial advisers, just as there has been an unprecedented volatility in the financial markets in general. Recruiting packages reached previously unseen levels in the second half of 2008. Since then, the size of recruiting deals has fallen significantly at most major firms and is about to fall again. Mergers have reduced the number of firms competing for advisers, and the culture of many private wealth management firms has been impacted as they became affiliated with commercial banks.
The retention packages offered as a result of merger or sale transaction have deteriorated or, as in the case of Wells Fargo and Wachovia, disappeared. The environment has become most unfavorable at the major firms for the financial advisers producing lower levels of annual revenues, below $400,000 or $500,000, or in some cases even below $1 million, as demonstrated by restructured payout plans for those advisers, low or non-existent retention packages and transactions like the sale of UBS branches to Stifel Nicolaus.
In addition, we have seen concerns arise among those on recruiting or retention deals over various legislative proposals related to compensation that could affect advisers at firms that have taken government assistance, or all firms in certain regulated categories. .
Seeing an opportunity, a second tier of firms has more aggressively entered the recruiting competition for advisers, some with the advantage of less adverse publicity and perceived “reputational” risk, some with the advantage of a more conservative history and stronger capital position.
This has had several impacts on the market. There is a mini-bubble in movement of advisers trying to catch favorable recruiting packages before they disappear. A number of factors are causing more advisers to consider going independent, often by forming their own advisory firms. These factors include: less attractive recruiting deals; producers at the low end of the scale being forced out; cost cutting that has adversely impacted support for advisers; a future where reduced payout is likely; client concerns created by the adverse publicity at some firms and advisers’ desire to control their own future and practice with less conflicts of interest (many having been burned by selling affiliate product).
There are many alternatives strategies for advisers planning their future, each of which shall be explored in more detail in future installments of this series. In considering strategic alternatives, advisers need to first evaluate their business as it is and as they want it to be in the future, and determine what services and forms of compensation they expect to receive.
1. Do you need to be associated with a broker-dealer? This is a critical primary issue. Over the years many, if not most, brokerage firm financial advisers have migrated to a primarily fee-based business, which is under an investment adviser registration. If securities commissions, including variable annuity and other variable insurance commissions and 12b-1 fees on mutual funds, are not significant to your business, you may not need to be in the broker-dealer business, with all of its related regulatory burden. Some advisers think they need a broker-dealer license to take care of issues like selling restricted stock, even if it is a minor part of their revenues. That is a mistake, as an investment adviser you can still assist a client in such matters as long as you are not receiving commissions.
2. Are you ready to be an entrepreneur and to handle all the details of running a business, especially one in a regulated industry, or can you afford to hire competent people to do so?
3. How strong is your desire to control your own life and business style?
4. Do you do any direct management of money that might result in a very valuable intangible asset of a strong track record some day?