At the beginning of the year, financial services recruiter Mark Elzweig described the market as a “Goldilocks” environment—not too hot and not too cold, a scenario that favors advisor movement.
That is not the case today. With the surge in the stock market and overall happy clients, the pace has slowed considerably.
As Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y., puts it: “You need clients upset and the advisor upset for a move to happen. They will not move because the grass is greener. Theirs has to be pretty worn and brown.”
Some advisors who want to move on are “pausing” right now to boost their trailing 12 numbers before they “hit their bid,” according to Elzweig, who heads Mark Elzweig Co. in New York City.
Also in play: an aging advisory force and wirehouse contracts that are nine to 10 years in length, a historic high. Statistics from Cerulli Associates indicate that more than 41% of wirehouse advisors are 55 and older. That percentage is even higher—at 46%—in the independent broker-dealer space.
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It’s a disconnect that Elzweig says should ultimately lead to shorter contracts. “At a certain point with these older advisors, you can’t keep saying I’ll give you more money as long as you sign for more years. It becomes psychologically unpalatable. They want five-year deals with less money,” he observes. “Many of these same people are entertaining independence more seriously than they ever were before.”
Unprecedented cachet for the independent sector? Perhaps.
“Everyone wants to know about the independents now. It doesn’t mean it’s right for everybody but it has a credibility it never used to,” says Sarch. “For years, wirehouse advisors thought that going independent was only for losers. The only person you saw go to LPL from Merrill Lynch was the guy being fired by Merrill Lynch. Today, some of these firms have platforms that rival the big boys.”
Deals by Channel
What kinds of recruiting packages are advisors seeing now as they look across channels? While the wirehouses weigh in with the biggest deals, it is the independent firms that offer the least restrictive terms. Here’s a snapshot:
The wirehouses: With longer contracts, firms are paying huge attention to an advisor’s trailing 12. The higher the percentage, the more the advisor gets upfront. Rick Peterson, who heads Rick Peterson & Associates in Houston, says the upfront bonus currently ranges from 70% to 150%.
Advisors who defect in the final years of a contract and have a good relationship with their manager would do well to try to negotiate down the amount of money they owe due to walking away early. “If you do all things right when you exit, sometimes you can get it reduced,” Peterson says. While the new firm cannot legally help the advisor pay the money back, he adds, it can help cover exit costs by throwing in a car, for example, or a sales assistant. As Peterson frames it: “All have little rabbits in the hole.”
According to Sarch, million dollar producers with a clean compliance record can get packages totaling three times their trailing 12 gross—roughly 130% paid upfront and subsequent bonuses based on delivering assets and growing their business.
“Producing advisors are in demand. Every firm needs revenue,” he says. “Deals are bigger but firms are much more discerning because they don’t want to hire other people’s problems. They want advisors that truly have a following.”
The independent space: Independent broker-dealer payouts are based on production as well as business model and generally range from 85% to 90% for mid-size producers, according to Jodie Papike, executive vice president of Cross-Search in Jamul, Calif.
At the moment, she says, the majority of advisors moving in the sector are those whose previous broker-dealers have gone out of business or those who have had some sort of disagreement with their existing broker-dealer.
“There’s no choice for a lot of advisors moving right now. It’s bleak,” says Papike, who specializes in the independent broker-dealer channel. “There has to be enough of a pain point in the broker-dealer relationship for the advisor to really make a move in this market.”
Most of the traffic is independent-to-independent with a “trickle” from the wirehouses. Packages haven’t changed much in the last year but mid-size broker-dealers are trying to get creative by paying registration costs and enhancing payouts over the first few months of a transition, according to Papike.
The largest broker-dealers may offer an upfront bonus but it is by no means universal. “The issue of upfront money is very difficult. It’s always changing,” she adds. “It depends on how the broker-dealer is doing at that point and they look at every advisor on a case-by-case basis. How profitable will that advisor potentially be?”
According to Elzweig’s research, independent broker-dealers will pay 10% to 15% upfront on a four- or five-year contract. Some of the large national brands will go up to 50%, including back end bonuses, for million dollar producers.
As a cautionary note, Sarch says that LPL famously has a 97% payout for its highest producers but, he asks: What do you get for that? “If you are paying more for health insurance, say, it’s a wash. It’s really hard to compare payouts apples to apples. As you execute your business, there are ticket charges. If they are high and you are very transactional, what does that get you? It’s very important to model your own specific business relative to what a new firm’s offering is.”
As for the RIA channel, Elzweig says the fiduciary model is becoming increasingly attractive to many advisors. With its 100% payout, it can also be lucrative. Ticket charges are typically less than $10 per transaction—half the cost charged by independent broker-dealers, which use them as a profit center. Elzweig says joining an RIA is also a “wonderful” way to sub out FINRA for the SEC, considered to be a more “benign” and “collaborative” regulator.
The regionals: The regional firms use the same math as the wirehouses. “More money means the advisor has to be in place for more time,” according to Elzweig. Total packages, with upfront and back end loading, range from 80% to 100% of a trailing 12. Most offer nine-year contracts; one offers a five-year deal.
Sarch says the appeal of the regionals for many is that they provide more sales support across production levels. “Whereas at a wirehouse you might have to do $1 million, $2 million or $3 million in production to get your own sales assistant, there you can do $1 million and get two assistants,” he notes. “You’re a bigger fish in a smaller pond.”
As for high-end boutiques like JP Morgan Securities, Credit Suisse, Barclays and Alex. Brown, Elzweig says deals offer about 125% upfront with some back end bonuses. Contracts are typically for seven years.
What can advisors do to make themselves look most appealing as they shop for a new corporate home?
Deliver a wow factor: It’s critical to get a prospective firm excited about you and your solid, steadily growing business, according to Elzweig. A big part of that is being able to clearly articulate your business model. “I’ve seen some prospective firms back off because the business model was too complicated to understand and it made them nervous,” he says. “This is an era of plain vanilla.”
Also, don’t take it for granted that just because you are a large producer that a firm wants to hire you. “Like everything else in life, there is a likability factor. What some advisors don’t realize is there is limited tolerance for prima donnas, no matter what your gross is,” he adds.
Be honest and transparent: There needs to be transparency on both sides. “This represents a major career move for the advisor and a major financial transaction for the hiring firm. The advisor should ask: What do you not do well? How are you fixing that, if that is the case? The firm should ask the same thing,” says Sarch.
One advisor told Sarch several years ago: “I’m selling my house and I want as much money as I can get for it. They are buying my house and they want it as cheaply as they can get it.” Sarch’s response: “You’re going to be living in the same house together for the next nine years. Go into this with realistic expectations.”
Convey serious intentions: If you talk to a lot of different prospective firms, Elzweig says, you are not incentivizing people to work that hard to recruit you. “Once you arrive at that firm you are truly interested in, let them know you are a serious prospect,” he notes. “You want to show them it’s worth their time to work hard to get you.”
Also, it’s best to let the firm come to you with a monetary offer—and usually after the second meeting, they will. “People don’t want to feel you are cavalierly shopping for money,” Elzweig adds.
And don’t ask for what you know you can’t get.
“Don’t squander political capital. Don’t make people feel you are unreasonable,” he says. “Don’t say: ‘I know you have people who want the same amount of money for a nine- or 10-year commitment but could you give me a five-year deal for the same amount of money?’ Understand the parameters going in.”
Get a pre-hire letter: It’s always a good idea to get the terms of a deal laid out in writing. “Especially when you are negotiating with a wirehouse and signing a deal for nine or 10 years, it’s fair to assume you will have several managers over the course of that time,” says Elzweig. “It’s very important to get a pre-hire letter that details everything you discussed and everything that has been assured.”
Disclose any bonuses: Sarch advises every advisor he works with to disclose their bonuses to their clients. “If not, former colleagues may use the deal against them—telling clients he’s not leaving in your best interests but his own,” he says.
Many advisors object to making a disclosure, saying it will make clients think they made a move because of the bonus. Sarch disagrees. “Would you rather be dealing with a free agent everyone chases or a free agent nobody values? This is all very much driven by supply and demand. Brokers should not be embarrassed about it,” he says. “They need to be able to explain why the move is in their clients’ best interest as well as their own best interest. If they can’t do that, they shouldn’t move.”