While limited industry data has made it clear that the pace of wirehouse recruiting, and the size of typical deals, has increased in recent years, there has been remarkably little information about the terms and details of the ‘typical’ deal. For the most part, this is because broker-dealers have not been very public about the deals that they’re offering, likely because too much knowledge limits their ability to negotiate on an advisor-specific basis for a more favorable deal. At the same time, brokers themselves are usually not very open about the deals they complete. In part, this is because many broker-dealers require them to sign non-disclosure deals to keep the terms secret, but in some cases the reality is simply that the broker doesn’t want other advisors or his/her clients to know what was paid to entice a change in firms (an area that FINRA is now scrutinizing).
The end result of this environment is a highly inefficient marketplace for advisors looking to transition from one wirehouse to another. Notwithstanding all this confusion, a new firm is looking to bring an end to the opacity of brokerage firm recruiting deals. Called “AdvisorHUB”, for $9.99 advisors will be able to download a current report detailing the recruiting deal terms of dozens of broker-dealers, private banks and wirehouses in today’s marketplace via an Apple or Android app, based on the intelligence that the AdvisorHUB team is able to gather from its available connections and networks.
An early glimpse at the data reveals a startling reality: in a world where the ‘typical’ RIA deal is approximately 2X revenue, the typical wirehouse recruiting package is as much as 350% (3.5X) trailing revenue. This suggests that the trickle of breakaway brokers (rather than a flood) may have less to do with the captive confines of the broker-dealer world and more to do with the fact that a broker can actually monetize their practice for as much or more than many RIAs. On the other hand, the reality is that the amounts that wirehouses are paying may well be unsustainable, especially if AdvisorHUB brings so much transparency to deal terms that every broker demands such treatment.
Nonetheless, for the time being, having built a practice in a wirehouse—and staying there—may have been far more lucrative than the independent community ever realized, and that the decision to break away is far more nuanced than just the concept of “having equity [to someday sell] in the advisory practice.”
The Typical Broker Recruiting Deal
So based on the AdvisorHUB data, what does the typical broker recruiting deal look like?
The starting point is to look at what the broker generated in revenue over the preceding 12 months. Let’s say the advisor had roughly $200M of AUM and was generating $2M of revenue (and likely receiving compensation of approximately $900,000 at a 45% payout rate). In today’s market, AdvisorHUB indicates that a “typical” deal, based on what Merrill Lynch is currently offering, would be recruiting compensation of approximately 325% to 350% of this trailing 12-month revenue (with a few wirehouses or large banks paying slightly more, and a number paying a bit less).
In dollar amounts, at a 325% recruiting deal, the payment to the advisor would be a total of $6.5M, paid out over a series of years. For instance, the terms might stipulate that the first 150%-of-trailing-12 is paid up front, with another 25%-of-trailing paid in six months assuming at least 65% of client assets have transferred, and another 50%-of-trailing paid after a year as long as the advisor has brought over at least 75% of the AUM and has generated at least 75% of prior revenue. At this point, the advisor has already received 150% + 25% + 50% = approximately 225% of the trailing 12-month revenue that he/she was earning at the prior broker-dealer (in addition to being paid under the usual payout rules for the actual revenue now being generated at the new firm).
To receive the remaining ~100%-of-trailing-12-month payments that would remain (to get from 225% to the “full” 325% amount), the advisor might have additional revenue growth benchmarks to meet in subsequent years; for instance, the end-of-year-two payment requires the advisor to be back to 95% of assets and 95% of revenue, and by the end of five years to reach 150% of prior assets and 150% of prior revenue to receive the last, full payment. To the extent these payment benchmarks are not achieved, the prior amounts already paid are not forfeited, it’s just that the new amount isn’t earned. Thus, for instance, an advisor who transfers with a recruiting package but fails to hit the benchmarks beyond year two may still have earned 265%-of-prior-revenue in payments, but won’t reach the full 325% target.