Finding the Right Safety Net

When changing broker-dealers, transition time is typically brief—only one or two months. Yet often, financial advisors place the weight of the world on this early part of the relationship, the “honeymoon period.” They are enticed by what appears to be a sweet offer and end up making a compromise that undoes their reasons for making the change in the first place. That compromise is usually in the form of up-front transition money.

Up-front Transition Money Doesn’t Always Pay Off

Making the right choice when switching to a new broker-dealer is crucial in terms of retaining clients during the transition. We encourage our clients to set their sights on the long-term goal because, ultimately, it’s the whole package that they have to live with in the coming years that should capture their attention, not a lump sum of money at the beginning of a relationship. Still, we see human nature rear its ugly head as advisors become blinded by an offer of a forgivable note.

Here are a few examples of how reps have compromised their goals when changing broker-dealers:

• Going with a firm that offers to cover $20,000 of initial expenses when in fact the rep would earn over $30,000 more per year at a firm offering a higher payout
• Taking a 10% forgivable note when another firm would save them more than that amount each year through lower ticket charges
• Accepting a large forgivable note even though the rep’s original intent was to achieve lower administrative fees on their advisory accounts (The new firm would have netted them around 85% while the sign-on bonus firm netted them 65% on advisory business, which equated to $40,000 more per year with the firm that netted them 85%.)

Instant Gratification: Going for the Marshmallow

This irrational human nature is well-illustrated by an experiment done in the early 1970s by American psychologist Walter Mischel at his Stanford University laboratory. The experiment was simple: Invite four-year-olds to eat marshmallows. Mischel would make each child an offer. They could eat one marshmallow right away or, if they were willing to wait for a few minutes while Mischel ran out to do an errand, they could eat two marshmallows when he returned. Initially, nearly every child decided they wanted to wait so they could get two marshmallows. Who doesn’t want more sweets?

Before Mischel left the room he told the child that if he or she rang a bell, Mischel would return and the child could eat a marshmallow. However, by ringing the bell, the child would forfeit the second marshmallow. Not surprisingly, most four-year-olds couldn’t resist the sugary treat for more than a few minutes. Comically, several children covered their eyes with their hands so they couldn’t see the marshmallow while others would start kicking the desk or pulling their hair in order to restrain themselves. Most of the children lasted less than one minute, while only a few were able to wait up to 15. Some of the children ate the marshmallow as soon as Mischel left the room, not even bothering to ring the bell.

Results from the marshmallow experiment demonstrated that some individuals were better at managing their impulses than others. Tracking these children to adulthood revealed some interesting trends. Children who rang the bell within a minute were much more likely to have behavioral problems later on in life. They got lower grades, struggled with stressful situations, were more likely to have substance abuse issues and had quick tempers. SAT scores were also lower on average than for those kids who waited several minutes before ringing the bell. The children who were able to wait before ringing the bell loved sweets and wanted the marshmallows just as much. However, they were better at using reason to control their impulses. These children went on to get higher SAT scores. They got into better colleges and had, on average, better adult outcomes.

Two Types of Advisor Personalities