The wirehouse channel is cutting back dramatically on upfront money offered to join their broker dealer. Also of note is the recent case of Merrill Lynch, which is trying to grow without offering traditional sign-on bonuses.
Both trends are a result of DOL rules, and DOL rules are having an impact on the independent broker-dealer channel, but not in ways you may think.
Of the 3,902 FINRA member firms (as tracked by Fishbowl Strategies in late February), approximately 25% offer some form of forgivable note (or sign-on bonus) to aid in the expenses and disruption of a broker dealer switch.
Much of this is concentrated in the top 50 independent broker dealers by revenue.
A profitability shell game is currently going on, as profit centers such as ticket-charge markups are sacrificed while advisory administration fees increase. Recruiting has been impacted to a degree, primarily in the form of recruiter layoffs at several broker dealers.
Sign-on bonuses have not changed dramatically, with the exception of Jackson National broker-dealers National Planning, SII, Invest and Investment Centers of America.
Historically, Jackson National broker-dealers offered sign-on bonuses up to 40% of an advisor’s trailing-12-month gross dealer concession.
With a seven-year note period tied to the sign-on bonus, if you stick around for seven years, you would owe nothing back. However, if you leave during the seven-year period, you will owe a portion of the bonus back to the broker dealer.
At the beginning of 2017, these bonuses dropped to 10-15%, possibly 20% if your practice is especially profitable.
This brings up another DOL-influenced trend: bonuses increasingly based on profitability of an advisor’s practice rather than based solely off gross dealer concession.
Low and High Profitability Books
You may wonder, what constitutes a low profitability book of business versus high profitability?
If your book is comprised of mutual funds or variable annuities held direct at the product companies, you fall under the low profitability category. This is because broker dealers have numerous profit centers in assets being held in brokerage accounts, but these assets are held away from brokerage accounts—and hence the low profit.
Stock and bond business with margin accounts or advisory held in brokerage accounts fall under the high-profit category, because the broker dealer makes markups on the ticket charges, margin spreads, markups on the advisory administration fees and often markups on third-party money manager management fees.
If you are a hybrid advisor holding your advisory assets at TD Ameritrade or Schwab, no surprise, you will fall under low profitability because the broker dealer only makes money off the payout grid.