Wirehouses and regional broker/dealers couldn't open their doors fast enough these past months as their training classes reeled in record numbers of rookies. With the worst of the hiring freezes and layoffs over, firms are, in part, compensating for lost time. But training is also starting to look more cost-efficient than it once did. With signing bonuses soaring into the stratosphere, and the population of financial advisors graying rapidly, recruiting older, experienced advisors has become a pretty expensive strategy for the long term.
“I can tell you we have been actively recruiting,” says Mark Benson, head of Merrill Lynch's training program, known as Practice Management Development Program (PMD). Benson noted that, historically, 80 percent of revenue generated by wealth management at Merrill comes from FAs hired and recruited by the firm. “We had a significant hiring effort in the second half of 2009 and that will continue into 2010 as we hire multiples of hundreds of new hires,” he added.
Even with their high failure rate, rookies, who can cost $250,000 to $300,000 and upwards to train, are sometimes a better bet than long-tenured recruits, the best of whom can command signing bonuses worth 300 percent of annual production, say analysts. “The signing deals are outrageous and I happen to think they are not economic,” says Andre Cappon, president of New York-based CBM Group, a consultant to the securities industry. “When you pay someone, for example, 100 percent of last year's production to stay seven or eight years, you are giving away your profit margin.” (Cappon recalls the 1980s when brokerages started poaching from each other with signing bonuses that topped out at 30 percent of trailing 12 months.)
Darin Manis, CEO of recruiting firm, RJ & Makay in Colorado Springs, Colorado, who is retained to find candidates for several large brokerages, estimates that Merrill Lynch and Morgan Stanley Smith Barney will each recruit at least 2,000 trainees this year. Morgan Stanley declined to comment directly on its hiring plans. Manis himself is busy, saying the volume of folks he is sending on interviews to clients, about 100 per month, has nearly quadrupled since last year. “What's behind this?” he asks. “Plain and simple. Firms like Morgan Stanley and Merrill Lynch are looking for long-term growth, and long-term growth is partly built on growing your own network of FAs.”
Alois Pirker, an industry analyst at Aite Group, says this latest hiring spree could pay off. “Hiring younger recruits is ultimately how you reach the next generation of investors,” he added. “It's a smart strategic move.” Today, more than half of all U.S. advisers are 50 years or older, and less than six percent are younger than 30, according to Cerulli Associates. “There is some degree of irony in the fact that an industry focused on managing the assets of retiring baby boomers is largely made up of aging babyboomers considering retirement,” a recent Cerulli report noted, adding that succession planning among advisors is becoming more important.
One financial advisor, posting on Registered Rep.'s forum, noted: “This is the wave of Baby Boomer retiring that we all know so much about….We have fewer and fewer qualified advisors to give help. Perfect storm for those of us who are around to provide the help.” A second poster responded, “The retail wealth management business is amongst the oldest in terms of gray hairs in any given career path in the U.S. Why? Firms cutting back hard on hiring and development in the 90s, 2001-2002, and again slaying their benches in 2008-2009.”
The rookie recruiting spree may also be a response, in part, to growing competition from the RIA channel, experts suggest. Of course, the wirehouse channel is losing at most 0.5 percent to 1.0 percent market share a year in retail client assets, a slight “moving of the needle,” says Cerulli Associates analyst Scott Smith. But if the needle keeps moving at this rate, he warned, wirehouse share of retail client assets will drop significantly — from 48 percent today to 41 percent by 2012.
“After years of focusing on poaching other firms' top advisors to assure themselves of a steady stream of competent advisors, more B/Ds are slowly re-orienting themselves toward training regimens to add new advisors to the industry,” says Smith in a research report. Today, in response to concerns about transitioning business as vets retire, some wirehouses are placing producers-in-training into established teams of senior advisors. In the past, many rookies were set loose to build their own books of business. “The wirehouses are particularly interested in hiring people who have already shown some kind of prior success, and who have built established networks and are entering this as a second career,” says Manis.
Merrill trainee Lewis Runnion, a 42-year-old native of Tennessee who works out of Manhattan, had a prior career in management at an annuity insurance company. He says he and other candidates, who recently joined the Merrill training program together, see great opportunity. His AUM is currently growing at a 40 percent annual rate. “All the [negative] noise in the media hasn't affected us, to be frank with you,” he says. “I think all of us have a better view now of what is important to clients.”
Other broker/dealers pulling out the stops for their training programs this year include Raymond James & Associates and Edward Jones. The latter expects to train 1,100 recruits in 2010, up from about 800 in 2009. Robert Patrick, Raymond James' director of education and development, says hiring tenacious rookies is a lot more cost-effective than dropping huge signing bonuses on older recruits. “Giving [trainees] a year or two of some kind of minimum salary and commission is a lot cheaper than bringing in and paying people 80, 100, 150 and 200 percent of trailing 12 months upfront,” says Patrick. Raymond James will launch about three or four classes this year for some 90 trainees. Dan Timm, a principal at Edward Jones in charge of branch development, scoffs at the practice of awarding huge signing bonuses. “We've always thought bonuses are crazy. We don't think you are buying brokers, you are renting them,” he says. “What would our financial advisors think if we went out there and bought somebody for 300 percent of trailing 12?”
Of course, in good times and bad, brokerages are always in the market for talent. But with hiring picking up in the last half of 2009, and job cuts easing, analysts reckon that industry-wide headcount ended slightly higher in 2009 versus 2008. Cerulli is projecting that the number of financial advisors in the U.S. totaled around 310,000 at the end of 2009, slightly higher than the year-end total for 2008 and about 2,000 more than at the end of 2007. (A much broader measure by the Financial Industry Regulatory Authority, that includes all people in the U.S. registered though not necessarily active as brokers, counted about 642,689 in November 2009.)
Earlier last year, the layoffs and the suspension of many training classes sent shivers through the industry. UBS, for example, already reeling from the credit crisis and a rash of negative publicity, stopped training recruits. (UBS is looking at resuming a training program, people familiar with the firm say.) At the same time, many brokers left the business as asset levels sank in the market downturn, depressing fee income. As the total number of advisors declined, some firms began poaching from rivals to shore up assets. But then training programs came roaring back by mid-year with Merill leading the charge just six months after the company eliminated hundreds of trainees from its Practice Management Development program. Merrill officials say back then they planned to boost adviser headcount by up to 450, which included a quota of big producers.
Merrill's Benson says the firm is receiving more applications today. “We are very pleased with how our program is doing,” he added. “From an economic standpoint, folks [trainees] are hitting their acquisition targets, bringing in new clients, generating income and hitting their numbers, which are actually going up month after month.”
Still, even as the hiring opportunities open up, the day-to-day realities for rookies in the advisory trenches are much the same as always. Aside from passing their Series 7 and 66 examinations in the first months, it's sometimes a tough grind even as the market has recovered from a year ago. Preston at Raymond James, also noting a dramatic increase in resumes received by the firm (up 25 percent over 12 months ago), says the challenge for managers running training programs is “to get the stars out of people's eyes.” He adds: “I would equate the first five to seven years of [a trainee's] career with being a junior lawyer at a law firm. You put in 80 to 90 hours a week, and ultimately it pays off for everyone in the business.”