How high can you go? It's a question all brokers and recruiters should be asking.
We are near all-time highs for broker acquisition packages, actually rivaling the money offered in the dot-com craze, and it's possible that packages may improve still more.
Sound too good to be true? Here's some detail: Several firms are now willing and able to give their best prospects packages in excess of 100 percent, based on the broker's trailing 12 months of gross production. The goal of proffering such packages is clear: overcoming inertia by forcing brokers to take long looks at their current jobs and to consider making the always tough decision to switch firms.
In the interest of arming financial advisors with all they need to assess such offers, here is a guide to deciding when it is mathematically justified to make a change.
Just That Simple — Or Is It?
In short, a move is justified when the broker comes out ahead financially. Figuring out when this is the case is not always straightforward.
Obviously, a broker is ahead the day he takes a deal that drops in his lap two or three times his pretax dollars from the previous 12 months. The broker is still further ahead when he is able to have the money on day one yet treat it, on a tax basis, as though received in equal payments over the length of the contract signed.
But there's a counterpoint: How much business, assets and goodwill will get lost in the move? If the amount lost is nominal, perhaps no greater than 10 percent, then the move is well justified. In contrast, if the broker's business takes a more significant hit in assets or production or both (a number in the 20 percent or greater range), then the broker will more than likely come to regret the move from a purely financial perspective.
How much more lucrative could the packages become? The relevant year to analyze broker transition packages is 1999. Due to the exceptional boom in the equity markets, the last quarter of that year and the first quarter of 2000 afforded brokers with record transition packages — 125 percent, and even as high as 150 percent of gross production in all-cash deals. With extremely few exceptions, firms have taken a bath on these acquisitions and are now reluctant to overpay, no matter how big a rainmaker. This does not mean that there is no room for improvement in the current pay scale. On the contrary, there is plenty of room for growth; it's just not going to happen.
No, You're Never Gonna Get It
Using basic present value mathematics, a firm could “purchase” a broker for 200 percent of his trailing 12 and still come out far ahead. For example, a broker producing $1,000,000 per year could be given $2,000,000 cash on day one and still create a positive financial arrangement for his new firm. The firm's gross margin would be approximately $600,000 per year for a six-year time frame. Such a return — $3,600,000 on an investment of $2,000,000 in six years — is unheard of in the annuities market, for instance. (A firm giving a broker a “signing bonus” is, in a manner of speaking, creating an annuity after all.)
The potential downside is twofold: The broker could come on board and never measure up to his past production. Or perhaps he leaves well before the end of his contract and is financially unable to repay the money he owes.
However, the potential upside offsets these two issues. For starters, the broker may well come in and shine, performing better than ever. He may likewise stay far longer than the five or six years the contract stipulates, a time in which the “annuity” continues to pay out to the firm.
Successful brokers are, plain and simple, commodities. They are an asset to the firm where they are working and desired often by many others. Moving isn't for everyone, but if a broker spends the time to analyze his business and a move seems justified, then that broker needs to know that now is a very financially advantageous time to make a move.