Start Up Funds/Bonus

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Aug 22, 2008 8:36 am

Hello all,

I've been approached by a few large b/d's to go indy.  One firm has offered 10% of T12 by way of a 7-year forgivable loan to cover start up costs and provide a cushion through the transition.

Before I start negotiating, I'd like to get an idea of what is the norm with these types of forgivable loans.  A co-worker says 30%, another friend says more like 15 or 20.

Your thoughts?

Aug 28, 2008 1:35 am

I've never heard of anything near 30%. More common from what I've hear are practical concerns like covering client ACAT fees. If you're bringing 300 accounts at $50 a pop, that might be somewhat valuable as an example.

Aug 28, 2008 7:59 pm

Here is a question for you to consider:

 
If you take the 7 year forgivable loan, are you really considered an independent? No, it is just another way to make you captive to the firm. Also, look for any qualifiers that accompany the 7 year commitment, primarily lower payout. For example, I have known several advisors who have taken the multi year forgivable loan but gave up a higher payout and they were held to that firm for the duration while the firm increased fees as the years went by. Run the numbers and compare; does it pay to take a little upfront money and be held psuedo captive?
 
Advice: if you take it, stash away some/most safely in the event you need to pay them back to get out of the remaining time commitment.
Aug 28, 2008 8:04 pm

I agree Tejas.  7 year forgivable loan = 7 years of obligation = not independent. 

There ain't no such thing as a free lunch.

Aug 28, 2008 8:10 pm

We were offered 10% trailing 12 in a 2 year forgivable loan, all ACAT fees to be picked up, office with a view, no rent for 12 months, and a couple other things.

 
Didn't take it.  Went with a BD that offered essentially nothing compared to that, but is much better for us.
Aug 29, 2008 1:14 am
Mucho de Tejas:

Here is a question for you to consider:

 
If you take the 7 year forgivable loan, are you really considered an independent? No, it is just another way to make you captive to the firm. Also, look for any qualifiers that accompany the 7 year commitment, primarily lower payout. For example, I have known several advisors who have taken the multi year forgivable loan but gave up a higher payout and they were held to that firm for the duration while the firm increased fees as the years went by. Run the numbers and compare; does it pay to take a little upfront money and be held psuedo captive?
 
Advice: if you take it, stash away some/most safely in the event you need to pay them back to get out of the remaining time commitment.



Exactly.

And don't forget to also consider that you get hit for income taxes on "non-cash income" each year when part of the loan is forgiven.

Sep 2, 2008 6:10 pm

Yeah, I get that.  But the fact remains that I'm going to need $40K or so to get my office up and running (I'm in a very high rent area).  One firm has offered 10% up front bonus and the other says they will cover ACAT fees.

My question is, is this stuff negotiable?

Sep 2, 2008 10:17 pm

Here's what I've found. If you're experienced wirehouse in the $400-600,000 range and have at least 50% fee business you could expect somewhere between 20% and 40% of your trailing 12 as upfront capital availale to you as start up.

 
Generaly broken down into different buckets, depending on the firm.
 
Bucket A. Upfront grant to cover furniture, ACATs, etc. Expect 5 - 15% here.
 
Bucket B. Upfront forgivable loan, 5-7 year term. Standard forgivable deal structure. 10-20% here.
 
Bucket C. Upfront loan repayable at prime or some other proxy over 3-5 year period. 10-25% here.
 
Highly fluid and less standardized than the deal structures offered for wirehouse-to-wirehouse transitions, but this is what I believe to be the current lay of the land for the major independents. I would regard these deals to be highly negotiable, although the above info is based simply on what was offered to me unsolicited and w/o any negotiation.
 
Don't get too hung up by those here who suggest you should reject any financial deals as somehow compromising your integrity or ability to operate as an independent. Likely these deals were not available when many of these folks went independent and they tend to view them suspicously.
 
You need capital to go independent and the independent b/ds are competing for your business and want to help you.  It's good, clean Capitalism.

I think this directly answers your question.
Sep 3, 2008 8:44 am

Great information again, northfield.  Keep it coming!  I would, however, take issue with your comment:

Don't get too hung up by those here who suggest you should reject any
financial deals as somehow compromising your integrity or ability to
operate as an independent. Likely these deals were not available when
many of these folks went independent and they tend to view them
suspicously."

Speaking for myself, very similar or better deals were certainly available.  More importantly, my preference against long term forgivable loans had nothing to do with thinking they somehow compromise your integrity.  One either has integrity or not, and if a loan affects your integrity you didn't really have it to begin with.

My distaste for forgivable loans is that they come with a price tag: your freedom to move away from that firm for that period of time, typically 5-7 years.  Pretty much like a CDSC, which I also dislike!  Given how quickly firms get gobbled up or otherwise transform significantly from what you signed up for, I personally don't find that price to be a fair exchange of value.  But that may be because I knew I wanted the freedom to control my own destiny as much as possible. 

Others obviously have different priorities.  I may not share those priorities, but I never felt those who think differently compromised their integrity.

Hope that clarifies my perspective on it, and thanks for posting again. 

Sep 4, 2008 12:42 am
Northfield:
 
You need capital to go independent and the independent b/ds are competing for your business and want to help you.  It's good, clean Capitalism.



It may well be free market competition.

But here's the thing that perplexes me.  How is it that a successful financial advisor is unable to save the relatively modest sum of 15--40,000 required to fund a start up indy office?  It would cause me to question their financial acumen if they were unable to do so without the assistance of loans from a b/d.

Where did all the money go?

Just my 2 cents.

Sep 4, 2008 7:50 am

Because most financial advisors are the worst at managing their own money. Seriously, take a look at the FINRA brokercheck to get an idea of how many advisors have filed bankruptcy, they have to disclose it. You would be astonished. Many are CFPs.

 
Many list the cause as medical and/or divorce related. While some are legitimate, others are a result of greed or the ever popular "incapable of managing an inconsistent flow of income."
 
Evel Knievel made $60 million in his lifetime, he spent $63.
May he rest in peace.
Sep 4, 2008 10:35 am

Just because a guy is a financial advisor is an expert on finances, doesn't mean he doesn't like to spend money.  Many of them are like pro athletes.  They need to drive the 45K car (or much more), have big houses, CC memberships, etc.

 
It's much like the many doctors and nurses you run into that are outside the hospital eating donuts and smoking on their breaks. 
 
Most people KNOW the right things to do, they just don't necessarily WANT to do them (like save money instead of spend it, or exercise and eat right).
Sep 5, 2008 12:48 pm

As an IBD representative, I can tell you that 10-40 is all in the realm of possibility.  In fact, last year there was one network that offered 40 of trailing 12 GDC plus an extra 2.5 for conversion expenses (acat fees, postage for new acct forms, etc)

It's negotiable as part of the overall package payout by prod type plus forgivable note plus other incentives.

Sep 7, 2008 12:07 pm

When I joined an Indy Firm 4 years ago, the deal was 15% Forgivable Loan and an optional 15% "working capital loan" paid back via lowering payout by 3 or 4% until loan was paid off.  I took the former (it was free money) but not the latter as I really didn't need it.  ACAT fees were not covered as the 15% forg loan was offered in leiu of.  I had plenty saved personally for the transition but didn't have to spend a dime of my own money becuase of the 15% Forgivable loan.  It really did help.  And it in no way holds me captive to the firm.  If I change firms before it is totally fogiven than I have to pay the balance back.  No big deal, so I pay the balance back (by now it is almost all forgiven anyway).  It is still money I never had to begin with.  Your alternative would be to go to a bank and borrow money and you'd have to pay it back no matter what.  This money you only pay back if you leave before it is forgiven.  While I agree with the statement "there is no such thing as a free lunch" there is absolutely no reason in my opinion to not to take this money or feel guilty or captive.  I suppose if none of the indy firms offered it, maybe they'd be able to bump the payouts up a little from 90 to 91% or something like that, but the money does help when making the transition.  However I also agree with the statements made that if you are a reasonably successfull FA than you should have savings for this.  C'mon... let's eat our own cooking here and have an "emergency fund"