Shaking the Tree

Enticing a third-year up-and-comer to switch firms has never been a difficult proposition for many big broker/dealers. For the rep, it's a big payday and a big boost of confidence, too. But it's no secret that most firms are frequently looking for well-established producers, advisors who have been making big bucks for a decade or more. Top brass always relishes bagging an elephant from another firm.

Enticing a third-year up-and-comer to switch firms has never been a difficult proposition for many big broker/dealers. For the rep, it's a big payday and a big boost of confidence, too. But it's no secret that most firms are frequently looking for well-established producers, advisors who have been making big bucks for a decade or more. Top brass always relishes bagging an elephant from another firm.

That can be a challenge, however, because of deferred compensation programs at the largest b/ds. Because of these “golden handcuffs,” many producers find that, unless they're extremely unhappy at their current shop, the idea of switching firms and leaving behind hundreds of thousands of dollars isn't appealing.

However, UBS Securities — considered by recruiters to be a pay-package innovator — may have found a solution to this quandary. Quite simply, UBS, in some cases, will pay some of the forfeited deferred comp, according to half a dozen recruiting sources in the industry. A UBS spokeswoman would not confirm this, only saying that packages are “tailored individually.”

“The thinking there is, ‘How can we unlock these golden handcuffs?’” says one recruiter, who asked not to be identified. “They've had a lot of success recruiting and they want to keep the momentum going.”

The firm is currently targeting reps with a stable of high-net-worth clients and large, annuitized books of business. The firm has been expanding its wealth management division in the last year, and is in the midst of hiring 100 to 150 wealth management teams to cover major money centers to service ultra-high-net-worth clients. Recent hires have, of course, come from other wirehouses, but also from the likes of Sanford C. Bernstein and Goldman Sachs.

The deferred comp packages are in addition to the traditional upfront cash bonuses, recruiters say. UBS will make up at least half of a rep's lost compensation — and a successful enough advisor could potentially receive up to 100 percent of lost deferred compensation.

“That's the real frontier,” says New York-based recruiter Mark Elzweig. “If firms can't address deferred compensation issues, they're limited to talented up-and-comers, which are certainly worthy hires — but except in rare instances, they're limiting themselves in terms of who they can attract.”

There are some caveats, however. Recruiters say UBS isn't offering this sort of perk to anyone — just producers who would be in the top two quintiles. For a 10-year veteran, a top quintile producer at UBS has more than $130 million in assets under management, according to an internal memo. Also, whether a producer receives more than 50 percent of lost compensation is based on assets brought in over the first couple of years.

To some, this structure represents the next step in trying to attract entrenched reps that have been with a firm for 10 or 15 years. Say a rep who has been making $1 million in gross production for the last three or five years wants to switch firms. A typical deferred bonus for a producer of this type would be about 5 percent. Assuming that vests over three years, that's $50,000 per year that a rep is leaving behind, in perpetuity. For an advisor making an income of $400,000, leaving behind $150,000 makes moving a much more complicated question.

“They're designed so a broker will say, ‘There's a reason to stay,’” says Andrew Tasnady of Tasnady & Assoc., a Port Washington, N.Y.-based compensation consultant. “If you're a fast-growing producer, you're outstripping the glue value. It's one thing if you were a $300,000 producer three years ago, and now you're at $700,000 — you've only deferred a few percentage points of the previous amount. But a lot of these plans increase the percentage for higher producers.”

But is UBS overspending? Among the more highly pilloried deals in the brokerage industry in the last few years were the mammoth offerings put together by Prudential Securities at the tail end of the bull market — which weighed the firm down. “Ultimately, that had such an adverse impact, when the market turned down that they could not sustain things,” one recruiter said. “But [UBS] wants to get the assets in there.” A September 2003 survey done by Citigroup underlines that point. Of 1,100 high-net-worth investors surveyed, 77 percent of those with UBS accounts said they'd be likely to move their accounts if their advisor left, which compares unfavorably with Morgan Stanley and Merrill Lynch at 38 percent and 28 percent, respectively.

Tasnady, however, says because upfront bonuses have steadily increased over the last several years (the stock market's whims notwithstanding) as a function of steadily rising advisor compensation, firms have no choice but to find an innovative approach. Some, like Elzweig, think this could catch on.

One thing's for sure: It makes a recruiter's job that much more difficult. “Whenever I talk to large producers, I have a calculator on my desk,” says Elzweig. “Because I know we're going to get into deferred compensation issues.”

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