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January 01, 2011 at 07:00 PM
“These days, it pays for wealth advisors to look at the fine print closely before signing on the dotted line,” argues Sanctuary Wealth Services in a recent report on recruiting. “While wirehouses and commercial banks are promising bigger and bigger recruiting checks to lure advisors, it’s unlikely that advisors will ever see all of the promised bounty.”
According to Sanctuary, this is because the economics of advisor recruiting checks, which are structured as forgivable loans to advisors, have changed dramatically since the financial crisis.
In the past, advisors were offered six- and even seven-figure recruiting checks as incentives to change firms every five years or so; these checks often totaled 100 percent to 150 percent of an advisor’s trailing 12-month fees and commissions. And, in the past few years, these figures rose between 180 percent and 350 percent. Now, however, the industry is facing profitability constraints and has attached “daunting conditions” to most recruiting offers, the group says.
Plus, the upfront cash has gone down. Sanctuary’s report cites the views of Carol Hartman, a partner with the executive search firm Caldwell Partners, who notes, “The deals are longer and more complex. It’s not just AUM or commissions that are measured. It is both. Brokers not only have to hit their current production numbers, but also exceed them by a big percentage.”
The tough conditions on these deals stem from a number of factors, according to Sanctuary. These include ongoing pressure on investment-management fees, the negative effect of low interest rates on money-market balances, investors’ shunning away from margin accounts and rising recruiting expenses. “At some firms, the cost of bringing new advisors on board is growing by 20 percentage points in 2010 to more than 60 percent of anemic revenues,” the report explains.
