“The economics of advisor recruitment checks, which are structured as forgivable loans to advisors, have changed dramatically in the aftermath of the financial crisis,” says Jeff Spears, in a November white paper. Recruiting payments have come back to bite some of the brokers who signed up for them.
A question nagged at Spears: “Why aren’t more really capable brokers going independent?” The result of that query is his study, “The Illusory Recruitment Check: What’s Next For Wealth Advisors.” Spears is co-founder and CEO of San Francisco-based Sanctuary Wealth Services.
Before, Spears explained, “it made perfect sense to take a six-or seven-figure recruitment check and change firms every five years.” The financial crisis has contributed to changes in the way firms recruit or retain brokers.
Sanctuary offers brokers, who want to leave for the independent registered investment advisor RIA life, services to help them make the transition, including investment, infrastructure and consulting services. Sanctuary also helps established RIAs outsource those services.
The Way Things Were
Spears was at Montgomery Securities when it was bought by NationsBank, which was gobbled up less than a year later by Bank of America. At the time Montgomery, a broker-dealer (BD), was purchased, the bank’s advisors had a fiduciary duty to clients Spears says. After they’d bought Montgomery, the bank had a formidable task: it needed to figure out how to best utilize Montgomery’s broker sales force along with the fiduciary advisors that already were at the bank.
The bank brought in the consulting firm McKinsey & Co. to advise it on how to create client teams that included an advisor who was a fiduciary, and had to put client’s interests first, and a broker functioning under the suitability standard, who did not, according to Spears.
The fiduciary, who was the client’s advisor, was supposed to introduce the broker. One can only imagine how that would have worked out, since, as Spears says, the management consultant’s plan was never used and that project didn’t get off the ground.
Eventually, however, the brokerage side of the bank grew bigger than the banking and fiduciary advice side of the bank—the brokerage side has been more lucrative than the fiduciary side of banking. Now, most investment clients of banks (outside of trust departments) deal with a broker, not an investment advisor, according to Spears. Many clients don’t understand the meaning of that change: not just the regulatory structure—SEC for investment advisors and Finra for brokers—but the move from a fiduciary relationship to the sales relationship. This editor is a member of the Committee for the Fiduciary Standard.
Superfinancials and Independents
All of this, of course, ties in to the movement to open platforms, growth of the independent BDs and growth of the RIA side of the investment business. It also directly relates to the formation of superfinancials, the banks and brokers that merged, sometimes with insurers, to become super-distributors of product, and the question that every advisor at one of those larger firms faces. Do I want to be a product distributor (a business centric model) or an advocate for my clients, (a client-centric model) and part of that decision is, do I want to put my clients first or myself and myself and my firm first?
For some, the question becomes one of money. It was fairly routine, over the past 15 or 20 years, Spears told AdvisorOne.com, to offer a broker with $1million “in production” a recruitment check of 100% to 150% of the trailing 12-months’ production. For that rep, a check for $1 million or $1.5 million would be hard to turn down.
Here’s How it Worked