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.