When confronted with an offer of “upfront money,” the two smartest words an advisor can utter are, “No thanks.”
Turning down a transition package is not an easy thing to do — particularly in a surging job market, and, yes, it is beginning to seem like party time again for stockbrokers. More and more advisors are considering leaving their current firms for greener pastures. We have seen this before, of course, and it ended badly for a lot of advisors. In the days of the high-tech bubble, firms were falling over themselves, offering signing packages at 100 percent or more of trailing 12-months gross production.
Otherwise rational brokers, when faced with the prospect of enormous checks, could not contain themselves and switched firms. But for many brokers, if not most, chasing upfront money was a huge mistake. Countless brokers now have nothing to show for the upfront money. With declining production as a result of the long bear market, many brokers had to live off the upfront money. Worse yet, other brokers followed their own investment advice and lost their shirts in high-tech stocks. All too many advisors now work just to pay the taxes on the phantom income generated by annual forgiveness of their forgivable loans.
Perhaps I am a bit jaded. It's true that I generally hear from those whose careers have gone wrong. Perhaps there are thousands of brokers who took the bait and are happy. Perhaps, but not likely.
I don't give legal advice in columns, but I'm happy to dispense some common sense. There are many reasons to switch firms, but upfront money is not one of them. There is a reason upfront money used to be called “transition” money. When taking into account the business you lose transitioning to a new firm, it is unlikely you will be better off economically from the move.
You also will be beholden to new masters. You will have to sign onerous and one-sided loan documents, and if your new master turns out to be worse than your old master, you are stuck. If you are going to move, be prepared to grin and bear it. It used to be that firms were offering three- to four-year forgiveness periods on upfront loans. In the last few years, that time period crept up to four- to five-years. Now we are seeing seven-year deals.
The advantage of a longer forgiveness period is that you pay taxes only on those amounts that are forgiven. The longer it takes to forgive the loan, the longer it takes for you to have taxable income. The downside is that if things don't work out in a few years, you have to pay back the unforgiven balance of the loan.
Another key detail is whether the money is paid all in cash or through a deferred-compensation plan. Smith Barney, in particular, likes to structure the upfront money with a significant piece through restricted stock in the CAP plan. According to the CAP plan, if you leave before the restricted stock vests, you forfeit the shares. If you have been following this magazine, you will know that there has been a lot of litigation involving the CAP plan. Avoid the problem by getting cash, not restricted shares.
Guaranteed salary and increased payouts are a good supplement to upfront money. You are assured of getting paid substantial sums, but don't have the obligation to repay the amounts if you leave after a couple of years.
Lastly, if you must take the upfront money, make sure to get all the details of your deal in writing. Branch managers are quick to promise sales support, expense accounts, good office space and the other perks that make work enjoyable. But if you don't get it in writing don't count on getting these things. The branch manager who hires you may be acting in good faith, but the relentless corporate cost-cutting may put pressure on him to carve back your perks.
I am not saying you never should move. If you are in an abusive situation or at a firm that does not provide you with the resources to grow your business, you may need to move to benefit your career.
Just be sure your decisions are guided by long-term career considerations, not the short-term gratification of the instant money.
Writer's BIO: William Jacobson is an attorney in Providence, R.I., who represents securities industry employees in employment disputes. wjacobson.com