The transition packages that wirehouse firms have been offering to first and second quintile financial advisors remain at historic highs, hovering in the neighborhood of 330 percent of trailing 12 months production. As much as 140 percent of that can come in the form of an upfront bonus, which is generally considered the “at-risk” part for the firm — the amount it pays out-of-pocket to essentially “buy” the assets and production of the advisor it is recruiting.
The balance of the deal is paid out in pieces (back-end bogeys), according to a schedule of asset and production growth hurdles. These bogeys are sometimes difficult to achieve, especially in markets like those of the last few years. What's more, they are typically tied to long-term promissory notes forgivable over another five to seven years. This all means it can take up to a maximum of 14 years for full payment of a deal.
Not surprisingly, and especially in the current volatile recruiting and market environment, many advisors are loathe to become contractually tied to a firm for such an extended period of time. But to what extent is an advisor really tied to the firm? If he doesn't want to stay for nine to 14 years, he will have to leave some money on the table — that is, assuming he would have met the growth hurdles set for him if he stayed. But if he is financially responsible with the piles of money he gets, at least he won't be in debt when he leaves.
Indeed, when an advisor chooses to leave before his note has been fully forgiven, he simply owes back the “unforgiven” portion of note. So, let's say you are a million-dollar producer who signed a nine-year note, met all of your production and asset goals over the next five years, and then decided you were ready to leave. And let's say you got $1.4 million upfront plus an additional $1.9 million in promissory notes over that five-year period for meeting your goals. You would be liable for approximately $1.46 million (the four-year balance remaining on the notes).
Again, in practical terms, this simply means that you must exercise some personal fiscal discipline — the same kind you would recommend to your clients — from the start, and only spend annually the portion of the deal that has been forgiven to date. If you prudently invest the sum(s) you receive for moving, then you will always have the unearned portion of your deal to repay in the event that you decide that your new firm is not the right place. You will be free to go without worrying how to repay it.
Let's take an example. In 2005, I was working with Andrew, a UBS advisor who, at the time, was producing $950,000 on just over $100 million in assets under management. I spent several months with Andrew discussing his options and, against my advice and without my assistance, he moved to Merrill Lynch, which was paying the largest deal at the time. Andrew was paid a handsome transition deal and signed a seven-year note (which was then the norm). One of the last bits of advice that I gave to Andrew prior to his move was that he should be very prudent with the money that he would receive, and to remember that as long as he had the money to pay back, he could leave at any time.
Fast forward to last summer. I received a call from Andrew, who was unhappy at Merrill and wanted to move on. He had been at Merrill for nearly five years and he had two years remaining on his note. My first question to him was, “How much of the incentive money you received has already been spent?” Fortunately, he had taken that part of my advice. He had cautiously invested the bulk of the money he received in 2005 and could easily access that money to pay it back.
And so, the whopping recruiting deals that are ascendant today should not be seen as a prison sentence without hope of parole. Smart advisors understand that safeguarding money can ensure their freedom.
Mindy Diamond is president of Diamond Consultants, of Chester, N.J., which specializes in retail brokerage and banking recruiting. www.diamondrecruiter.com.