Are You a Wirehouse Broker Thinking of Independence? Consider What You Owe

It’s one thing for a wirehouse broker to reap the benefits of independence, including bigger payouts at independent BDs or 100% “payouts” if you become an RIA, but in a new whitepaper, securities attorney Patrick Burns warns such brokers not to overlook the obligations they may have under recruitment or retention packages that they signed with their old brokerage firms.

“A lot of people get star struck by the dollars put in front of them” when it comes to such packages, but Burns (left) reminds them that there’s a cost to that money. “The devil is in the details,” he said in a Friday interview, including “significant strings and the tax implications of forgivable debt,” and if the broker wants to go independent, “ they want their money back.”

Burns says that when his firm interviews wirehouse brokers who are thinking of leaving and want to retain Burns, one of the first questions he asks is if the broker has a recruitment or retention package, followed by “What’s your financial condition? Do you still have the money? What are your intentions with regard to the promissory note?”  

The responding brokers “are all over the map,” he says. Some have the money to pay off a promissory note, but many do not. And if they leave for another wirehouse, in their new position, “all their production is getting eaten up by paying back what they owe or putting money aside for taxes.”

Burns says many brokers have the “unrealistic expectation” that if they move from one firm to another, they could just roll over their old debt for new debt, “kicking the can down the road.” But he warns, “You could get an even more draconian agreement.” The wirehouses, he says, “ have caught on and have tightened the terms of the notes as they’ve run into collection problems.”