This is the second in a two-part blog series that uses data from the AdvisorHUB wirehouse comp app to explore which might be more lucrative for an advisor: to take a package from a wirehouse or to sell your RIA firm. In part two below, we look at the implications of that exploration for ‘breakaway brokers.’
As we argued in part one of this series, the AdvisorHUB data suggests that the financial gap between RIAs and wirehouses—including the potential to monetize the equity of the practice—may be much narrower than many have implied. In essence, the existence of recruiting and retention deals is forcing the profits of advisors within the two channels to be more aligned; anything less really would drive an exodus of advisors from one channel to the other for sheer monetary reasons. In fact, the financial strength of monetization in the wirehouse channel itself may help clarify why the breakaway broker trend isn’t more pronounced: the financial benefits of doing so may not be so great. It also suggests that the deals are a key factor preventing a wirehouse exodus. In Australia such recruiting and retention deals were recently banned as a part of that country’s Future of Financial Advice (FOFA) reforms, and there seems to be a significant recent uptick in Australia in the number of advisors breaking away to form their own independent practices.
Despite the financial appeal of the recruiting and retention deals, there’s little reason to expect the breakaway broker trend to end anytime soon. For many advisors who break away, finances and profits are only part of the equation; it’s also about true control of the business, flexibility of how the practice is structured, a desire to more clearly align advisor and client interests (and perhaps even communicate fiduciary as a part of the firm’s marketing) or simply a desire to have more control of how the ultimate equity of the business is structured and how it may be monetized. Accordingly, “mid-point” solutions like Hightower Advisors should continue to grow, and our Pinnacle Advisor Solutions offering continues to receive interest from breakaway brokers looking for assistance in how to structure their independent practices efficiently (even as more and more independent RIAs come on board to the platform as well).
Ironically, perhaps the greatest temptation for the wirehouse broker is that while an independent firm can only be sold once, a wirehouse practice may even be more profitable by remaining in the wirehouse channel where it can be “sold” several times by simply engaging in a new recruiting (or at least, retention) deal every time their prior contract comes up for renewal .That allows the practice to be monetized several times over the span of the advisor’s career even while continuing to be paid as an advisor (though jumping firms in such a manner may well result in client attrition and almost certainly is not in a client’s best interest).
On the other hand, given questions about the sustainability of wirehouses continuing to pay recruiting bonuses at these levels, it’s also possible that the peak of wirehouse recruiting deals may already be passing. That would suggest that while it’s an effective current strategy to monetize a practice, it’s less clear whether it will still be there in the future for those building a practice today (at least, compared to the greater certainly of having outright ownership of the business).
Is AdvisorHUB an Industry Disruptor?
The dynamics of these recruiting and retention deals for wirehouse advisors have existed for years, though they have been on the rise in recent years. A large burst of deals occurred in the aftermath of the financial crisis in particular, as large firm revenue plunged with the market decline (and the contraction of investment banking activity), leading to a big push for greater “stable” revenue from wealth management. The post-financial-crisis deal activity was likely further accelerated when the value of many brokers’ deferred compensation plans filled with the stock of downfallen broker-dealers plummeted, further reducing the incentive to stay put.
Yet given that many of those deals had five-to-seven-year time windows, as we enter 2014 a renewed interest in broker changes seems to be emerging, as the 2009 five-year deals come to an end and the most successful wirehouse advisors once again try to decide whether to pursue a recruiting deal, break away to independence or at least engage their current firm to “renew” their retention bonus and be “dissuaded” from leaving.
Accordingly, the launch of AdvisorHUB may be well timed. It’s also probably not a coincidence given the knowledge and background of founder Andrew Parish (a former broker recruiter) about the recruiting landscape, but its launch comes at a time that could potentially be highly disruptive to the landscape. Arguably, the recruiting deals from many wirehouse broker-dealers are actually so lucrative that they aren’t sustainable; in other words, if all advisors consistently asked for the same ‘typical’ deal, the wirehouses couldn’t afford to offer them all at once.
Ironically, bringing transparency to all the deals may simultaneously put pressure on the firms that are behind the curve to raise their offers or face slower growth as advisors decline for better offers elsewhere (or after looking at the available options on AdvisorHUB, decide to go in another direction). In the longer run the average deal itself may have to come down in value if it’s not sustainable for all broker-dealers in the aggregate.
That could lead to a stronger alignment between wirehouse and RIA total take-home compensation over an advisor’s career span. So as profit margins become more consistent industry-wide, a wirehouse practice of the future may be less lucrative than it is now.
While these dynamics of transparency and market efficiency are a positive for advisors who have built their businesses on a broker-dealer platform, the prospective margin compression is a negative for the broker-dealers themselves, and even a potential threat to their businesses. Many BDs have thrived in the recruiting world on the inefficiency of the marketplace. Advisors being recruited must endure a time-consuming process just to get a “bid” from each prospective firm, and even then have little to compare to except spending even more time to get more other bids. Accordingly, it remains to be seen whether or how the large brokerage firms will respond to AdvisorHUB. Would they go as far as filing suit to shut it down? Would AdvisorHUB continue to get viable market intelligence on the typical deals that are occurring? Will FINRA’s proposed recruiting disclosure rule expand the information available to brokers?
For the time being, the AdvisorHUB platform provides a fascinating glimpse into a marketplace that has been closed to many independent and wirehouse brokers. For $9.99 via an Apple or Android app, advisors can download a current report of the broker-dealer recruiting landscape and view terms of the “typical” deal offered to advisors from dozens of broker-dealers and wirehouses in today’s marketplace, based on the intelligence that the AdvisorHUB team is able to gather from its available connections and networks. On the AdvisorHUB website, advisors can pay $9.99/month for ongoing deal information, an interactive map and tracking of recruiting, and the site will feature some content reporting on the latest trends in the advisor recruiting landscape.
View the first blog in this series on AdvisorHUB and its impact on brokers and RIAs.