A ten-year veteran of a large wirehouse firm says he's solicited regularly about switching firms. “I pay attention to the deals. I'm curious to know what they're offering. I'm not really ready to move, but they keep trying,” he says. Of course they do. With trailing 12-months production of $2 million and about $400 million in client assets under management, it's no wonder he's popular with the competition. “The sign-on bonuses they put on the table are all above 200 percent of trailing 12. Some have been much, much higher than that.”
Recruiting bonuses are probably one of the few things that have been consistent for top-producing brokers over the last year. Even with the turmoil in the industry involving failed firms, major merger and acquisition deals, a devastating market and depressing earnings reports, wirehouse advisors — at least top producers like those on our Top 100 list (on p. 43) — have been able to rely on the fact that hefty sign-on packages from rival firms are almost always available to them. And if the grim economy and market couldn't hamper these big deals, then chances are they're here to stay.
“Recruiting deals will always remain a big part of this industry,” says Danny Sarch, of Leitner Sarch Consultants Ltd., a recruiting firm in White Plains, N.Y. “It's hard to see them going away because they're sometimes the best way to grow a firm with the best advisors.”
Sarch says there are four ways in which wirehouses can grow: recruiting, acquisitions, so-called same-store sales, also known as increased work productivity, and training. “Recruiting is the only sure thing out of those four,” he says. Training new advisors is just now starting to make a comeback, while acquisitions are expensive because firms have to pay a retention package on top of what they paid for the firm they bought. Same-store sales means motivating existing reps to gather more assets and clients, and squeeze more revenue out of those assets and clients. Firms need a combination or at least one of these methods to be strong. “Recruiting has been the sure thing in the last few years,” says Sarch.
Over the last few months, there has been plenty of talk in the industry that the days of 200-percent plus recruiting bonuses would soon be a thing of the past. Some recruiters were convinced that after the big wirehouse brands had been dragged through the mud, offering huge signing bonuses to financial advisors would be frowned upon, or worse — make daily headlines. Because of the state of the markets and the economy, there was also talk that firms would consider basing recruiting bonuses on advisors' trailing three-months production instead of 12 months. “Production had slowed down so much because of the market and firms were thinking, ‘Why not just base pay on the broker's performance in the last three months?’” says one recruiter.
Wachovia Securities did — briefly, say some recruiters. Wells Fargo, its new parent company, was reportedly taking trailing three-months production and multiplying it by 4 to get a lower trailing 12-month run-rate number. If that revised figure was not 85 percent of the rep's actual trailing 12, then the bonus would be based on the revised figure and not the actual trailing 12 — resulting in a less attractive deal. However, if the revised figure was at least 85 percent of the actual trailing 12-month production, then the rep would receive a “normal” deal.
That idea got tossed not long after it was announced. “Trailing three-month production is definitely not the future — at least not for big advisors. Everyone was fired up about the trailing three months and it's just not going to work,” says Darin Manis, chief executive of RJ & Makay, a financial recruiting firm in Colorado Springs, Colo. Recruiters say veteran brokers with significant books of business have grown accustomed to huge upfront deals and won't settle for anything less. Wells Fargo declined to comment on its own recruiting bonus offers.
Unlike executive compensation, financial advisor recruiting bonuses have, so far, been kept quiet and so haven't been subject to the same public scrutiny. “No one in the mainstream media has really uncovered this whole issue. We've seen them pick up on the executive compensation and the AIG bonuses. So long as broker recruiting bonuses are not raised in the public domain, firms will keep offering them,” says Bill McGovern, a former business development executive for Raymond James Financial Services, who now operates consulting firm B/D Search in St. Petersburg, Fla.
For now, the deal numbers have barely budged. Every large firm on the street today is offering recruiting deals above 200 percent. (Of course, most of those deals are only available to first and second quintile advisors.) Right now, Bank of America Merrill Lynch and Morgan Stanley Smith Barney offer similarly rich deals. At Merrill, many first-quintile advisors can expect up to 250 percent of trailing 12-month production to join the firm, with about 140 percent in cash upfront. The remainder is paid out over the next five years so long as the advisor meets certain growth requirements. To get the full bonus, by year five, the rep has to increase his assets to 1.5 times the assets he had when he signed. Plus, Merrill will cover whatever deferred compensation the advisor left behind at the old firm.
Smith Barney Morgan Stanley has also sweetened its recruiting deals in the past month. First-quintile producers can now expect up to 250 percent of trailing 12-months production with 140 percent in upfront cash. The rest is made up, again, through growth requirements. Smith Barney Morgan Stanley is also offering advisors an additional 20 percent in cash as soon as 70 percent of the advisor's original assets have been transferred to the firm. “Morgan Stanley Smith Barney and Bank of America Merrill Lynch are really battling it out for top advisors right now. Both are being very aggressive. As soon as you think the deals can't stay this high, the firms prove you wrong. The big deals just keep coming,” says one recruiter who works with the firms.
But over at UBS, the deals are somewhat cooler. “At this point, UBS is not nearly as aggressive as Smith Barney or Merrill,” says one recruiter. The maximum deal at UBS stands at about 220 percent of trailing 12-months production. The upfront cash portion is 100 percent at a maximum while the remaining 120 percent is available on the backend. But that 30 percent difference in total deal value versus Merrill and Morgan is the equivalent of several hundreds of thousands of dollars. As one recruiter puts it, “That's a horrible deal. It's hardly different than what the other firms are offering as retention packages for their existing brokers. You're not going to be able to lure in big recruits with that kind of deal.”
The current regulatory problems at UBS also get in the way of the firm's recruiting success. “UBS has had trouble recruiting and the IRS tax problems don't help. They're vulnerable right now,” says a recruiter who works with the firm. On top of that, some existing UBS advisors are irritable at the fact that practically all their peers at other firms are getting some sort of retention deal. UBS is the only firm on the Street not offering a retention package. “That's a major red flag for them right now,” the recruiter adds.
But chances are UBS won't remain the “vulnerable” firm for very long. Recruiters say they expect UBS to raise its sign-on bonus soon. “They should be announcing something comparable to their competitors,” says the recruiter.
And that's how the recruiting game seems to work: Firms play recruiting chicken with one another. One day Merrill Lynch is offering the best deal; the next day UBS could decide it needs to outdo Merrill and will offer a larger maximum deal. “One firm will drop the value of their maximum deal and another firm will realize it and they'll step up their own deals a little to grab market share. They play off one another,” says a recruiter.
Often enough, what one firm offers in sign-on bonuses is directly influenced by the offers being made by the competitor down the street, recruiters say. “These guys are very well aware of what their competitors are offering day to day. The recruiters, managers and financial guys will decide if it's necessary to bump up the deals,” he says. Branch managers are especially in tune with what the competition is offering to coveted reps. It's part of their job to know. “I'm actually not surprised at how good the intel is as far as who's offering what. Branch office managers have buddies in different firms. As soon a conference call is done, they're talking to those friends and other wirehouse BOMs are finding out minutes after something changes,” he adds.
Manis says it's hard to keep such things secret. “It's an industry that has the biggest names in the world: Morgan Stanley, Bank of America, UBS, Smith Barney. They've got hundreds of thousands of employees. But at the end of the day, it's still a very, very small world in the financial advisor arena. That's why people are so impressed when secrets are actually kept,” Manis adds.
Rick Peterson, president of Rick Peterson & Associates, a Houston-based industry recruiting firm, says that when firms do lower their recruiting offers 20 or 30 percent, like, say, UBS did, they are saying one of several different things. “It could be that recruiting is not a major business component for the time being. Maybe there aren't that many desks open to fill. Or, maybe they have few defections right now and don't need to pay up for new advisors.”
Firms also base their upfront bonus levels on what the potential advisor pipeline looks like. If the number of financial advisors interested in joining the firm is low for coming weeks, managers may bump the recruiting deals up a little bit. The business development teams know exactly how many advisors are coming and going. If they're losing advisors and the recruiting looks slow, they will likely raise the sign-on bonus to bump those numbers up again. “They will likely talk to the financial management and discuss how much they want to step up the deals and for how long. It's done very quickly,” Peterson says.
But while firms have significantly raised their average recruiting deals, they're also expecting major commitment from new recruits. “The 200-percent plus deals really started making headway in 2007. But that came with changes in the number of years an advisor had to stay with the firm. Back then the notes required someone to stay for five or six years [to get full deferred compensation packages]. Now, when the deals reach above 200 percent, the firm is asking you to stay for eight or nine years,” McGovern says. There are also several growth requirements attached to the deals above 200 percent. “Several years ago the firm would give you a check and expect you to meet goals that weren't tied to a bonus. If you didn't meet the goals, they'd try and recover the money from you. The deals today are much more binding,” he adds.
Regardless, the constant competition between firms over recruiting deals isn't likely to go away. “Firms are still seizing the day and see recruiting as major opportunity for growth. They're going to keep being very aggressive, and it looks like none of the firms will lower what they're offering by too much,” he says. Further, as Peterson puts it, “It's not easy for brokers to move their books. Top advisors expect and demand competitive bonuses for going through that difficult process.”