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Terminating a Note Early: When the Pain of Staying Outweighs the Cost of Leaving

When an advisor signs a recruiting deal, the firm is making an investment in that individual, and the advisor is signifying the intent to make good on the firm’s investment. But situations change over time. Is there a way out?

The length of time on recruiting packages structured as forgivable notes has extended over recent years as firms look for ways to offer bigger deals while tying up advisors longer. Seven years was once the norm, and that has morphed over time to nine. Some deals even extend to 11 or 13 years.

Of course, from a firm’s perspective, more extended notes allow them to amortize a large, capital-intensive payment over a greater period of time, putting less pressure on its balance sheet.

But if an advisor signs an 11-year note, are they stuck at that firm for 11 years—win, lose or draw? Definitely not.

The truth is that no advisor is ever truly stuck; it’s purely a matter of weighing pain versus gain.

Put another way, does the potential upside of changing firms or models and solving for frustrations justify the hassle associated with a move? AND is there a willingness to accept the financial penalties of terminating a forgivable note early?

It’s important to recognize that firms are making an investment in each advisor who signs on the dotted line. And likewise, for advisors, accepting a recruiting deal signifies the intent to make good on the firm’s investment. But the reality is that situations change over time—and what might have seemed right years ago may not be today. That is, the status quo no longer serves an advisor and their business best.

So, what might drive an advisor to leave early with meaningful time left on an existing obligation?

It’s possible that an advisor joins a firm with certain expectations around culture, technology and platform. Yet, what might have seemed “good” early on becomes decidedly less than optimal for supporting the continued growth of the business. This calculus may change as the note continues to amortize and less money is owed.

Or perhaps the advisor, while frustrated, learns to accept the limitations—that is, until time reduces the financial obligation and the willingness to move becomes greater.

Ultimately, an advisor who has five years and $8 million left on a note would need to be in far more serious pain to even consider a change versus another with one year and $500,000 remaining.

What does an advisor need to know if considering a change with a meaningful balance left on their note?

  1. A forgivable note is NOT an immutable contract: Advisors always have the option to pay back the unamortized portion of their deal and “buy” their freedom. But the more time is left, the more expensive that proposition becomes—making the “value” of the move far more critical. Is it the right time to make a change, or does it make better sense to wait it out? And for those who do not practice smart fiscal restraint, paying back any monies owed can be even more challenging—so allowing more time for the note to forgive might be a wise choice.
  2. Additional monies to pay off the note: In the past, if an advisor owed money on a deal, they were responsible to pay it back. Yet, in today’s ultra-competitive market, some firms are demonstrating a willingness to go the extra mile for the right advisor by paying off the note on top of a really sexy deal. If they want an advisor badly enough, they may make it worth their while not to wait for the note to terminate.
  3. Avoiding the reputation of being a “serial mover”: When signing a note, advisors should have every intention of staying for the life of the obligation. It’s a commitment to that firm, and it is paying you handsomely for doing so. But stuff happens—so it’s nice to know that advisors have the flexibility to change if circumstances warrant.
  4. The potential of client fatigue: With each subsequent move, the burden of proof on the value of that move to clients becomes much greater. That is, there’d better be truly valid reasons for asking clients to go through the hassle of following again. So, frustrations aside, it’s important to consider if the move will indeed be needle moving enough to solve for the advisor’s frustrations while positively impacting client service.

For those who have signed a long-term note, there is an out, provided the advisor can establish that any initial financial loss will be offset by the potential value gained—monetary or otherwise—in a new firm or model.

Mindy Diamond is CEO of Diamond Consultants in Morristown, N.J., a nationally recognized boutique search and consulting firm in the financial services industry. Jason Diamond is vice president, senior consultant of Diamond Consultants.

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