What You Need to Know
- Commonwealth has now shifted to basing advisor transition money on asset levels instead of a percentage of GDC.
- The change followed a similar one by rival LPL Financial.
- The shift is a logical one as the industry continues to shift in favor of fee-based advice, recruiters say.
The shift that first LPL Financial and now Commonwealth Financial Network have made from production rates to asset levels when calculating transition assistance for recruited advisors makes sense based on the evolution of advisor books to an increased percentage of advisory assets, according to industry recruiters.
With books of business increasingly being made up substantially of advisory assets, “evolving to transition money based on basis points rather than a percentage of gross dealer concession is a logical move” for the independent broker-dealers, Jon Henschen, founder of Henschen & Associates, told ThinkAdvisor in a phone interview.
The shift in strategy stands to also help IBDs trying to compete with RIA custodians and other IBDs for advisors, Louis Diamond, president of Diamond Consultants, said Monday.
Similarly, Andy Tasnady, managing partner of Tasnady Associates, told ThinkAdvisor by email Monday that the moves by LPL and now Commonwealth “makes sense now that the retail investment world (and its revenues) are now fee-based rather than the older school transaction (trade) based.”
After all, the “biggest revenue sources now are fees from managed money and, to a lesser extent, spreads on cash balances,” Tasnady added.
Commonwealth is now offering advisors it recruits forgivable notes that are based on the advisor’s asset level instead of a percentage of production as had been the case for the firm and the sector overall in the past.
“We formally switched that over right in the beginning of the year,” according to Wayne Bloom, Commonwealth CEO. The change was made because the new method better “reflects how we do business today,” he told ThinkAdvisor in a phone interview on Wednesday.
Although Commonwealth remains a BD and “transactional, commission-based business is still appropriate in certain instances,” he explained, “in 2021, about 86% of our advisor revenue was fees, so Commonwealth is more like a national RIA than it is a broker-dealer.”
Commission and production are just “not what resonates with advisors” now, he said, adding, “they’re more focused on being fiduciaries and doing a great job for their clients.”
Noting that the change in formula has received a positive reaction from advisors joining Commonwealth, he said: “It seems a little outdated that you’re rewarding people or basing their transition on the amount of commissions” they’re charging clients.
The firm’s shift was first reported by Wealthmanagement.com, which said the deals range from 30 to 35 basis points on assets.
The basis points are “unique to each individual,” Bloom told ThinkAdvisor, noting: “There are some higher. There are some lower. But that’s in the range,” he said of the 30-35, calling that about the average basis points recruited advisors are receiving.
More Profitability, Less Churning
“Firms have been focusing note money more on profitability,” Henschen said, noting Commonwealth’s move followed LPL’s, more than a year ago.
LPL confirmed it started using asset levels instead of production rates to calculate recruiting deals. But it didn’t say when or why it made the change.
Paying on basis points, meanwhile, is “just now starting to spread” in the sector in recent months, Henschen added.
More BDs will now “pick apart the book” of business the advisor has; “they’ll run it through a matrix and it’ll spit out a number that they’re going to pay for the note amount and that number it determines is based on profitability,” Henschen explained. “So they’re paying more for advisory business and less on other business including assets held away from the BD.”