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Transition Deals Are More Competitive Than Ever: Report

Baseline recruitment deals were up last year, even among the independents, and many firms are getting more creative with their deal structures to incentivize movement, according to a recent Diamond Consultants report.

The significant market volatility of 2022 did not deter advisor recruiting. In fact, more than 9,000 advisors (with three or more years’ experience) changed firms last year, an average of 750 per month, according to the most recent Diamond Consultants Advisor Transition Report.

One major factor driving the movement—although not the sole contributor—was transition deals, which are at the most competitive levels Diamond Consultants, the financial advisor recruiting firm, has ever seen. Baseline recruitment deals were up across the board, and many firms are getting more creative with their deal structures to win more advisors.

“Advisors usually decide to move from their firm due to a combination of being frustrated or limited by their current situation and finding another firm or model that they see as more effective or efficient,” the report stated. “But it’s clear that deals are also an important factor—which somewhat explains why some firms are having tremendous recruiting success while others struggle.”

The report stated some firms, such as UBS, RBC Wealth Management and LPL Financial, offered short-term teaser deals to incentivize advisors to move. As a result, UBS saw a 76% uptick in advisors joining in the second half, when the firm ran the teaser deal, compared with the first half of the year.

Merrill Lynch announced this year that after focusing on its organic growth for a period of time, the firm is back to recruiting veteran advisors, although it won’t do so by offering some of the irrational deals competitors are handing out.

You often hear about the lofty transition deals in the wirehouse channel, but many of the independent firms got more competitive with their deals. The independents have traditionally offered from 25% to 50% of an advisor’s gross dealer concessions (GDC). That has risen to between 35% and 100% of advisor GDC, the report stated. Some broker/dealers are paying even more than that.

Also in 2022, some b/ds, such as Commonwealth Financial Network and LPL, started structuring forgivable notes as a function of basis points on the advisor’s assets, rather than production.

“Independent firms had the benefit of greater profitability from increased net interest margin, and they felt compelled to increase deals to compete against a robust and highly competitive industry landscape,” the report stated.

While deals have traditionally been structured with upfront/back-end hurdles, some firms have started to use guaranteed amounts and/or salaries.

“Many advisors prefer the certainty of a bird in the hand even if the headline package is smaller (advisors worry about portability and market conditions and the impact they will have on hitting back-end hurdles),” according to the report.

Some firms also included provisions for repayment of outstanding notes, sunset deal balances or unvested deferred comp balances in their deals.

Baseline deals in the traditional employee channel now stand at over 300% of an advisor’s trailing-12-months production, including upfront amounts and back ends. But the largest, growth-minded firms are receiving bids over 330% of trailing 12, and as high as 400% in some cases. These firms are also getting more creative with structures; for instance, some are customizing hurdles to match a team’s special circumstances, extending notes to unlock more liquidity and uncapping back-end earnouts.

Overall, recruiting at the four wirehouses was down a net 504 advisors in 2022, with Morgan Stanley being the only net gainer with 189 new advisors during the year. Diamond attributes the wins to Morgan Stanley’s acquisitions of E*Trade, Eaton Vance and Solium Capital. While Wells Fargo’s employee channel lost head count, many of these advisors moved into its independent b/d channel, Wells Fargo Advisors Financial Network.

The regional firms, which include Raymond James & Associates, RBC, R. W. Baird, Stifel, Janney Montgomery Scott and Edward Jones, added a little over 300 advisors in 2022, although Edward Jones had a net loss of 180 advisors.

The Diamond report also analyzed recruiting at the boutique firms, which include  First Republic Bank and Rockefeller Capital Management. And while this category saw a net loss, Diamond attributes that to over 200 advisors who departed JP Morgan Securities and the JP Morgan Bank channel.

The IBDs tracked by Diamond saw net gains in advisor head count, led by LPL at 990 in net new advisors Cetera at 417, and Wells Fargo FiNet at 270, showing that advisors preferred the larger broker/dealers.

“These firms tended to offer better economics, larger tech budgets, and in some cases multiple affiliation channels that afforded advisors increased optionality down the line,” the report stated. “Given the considerable number of sales at the broker/dealer level in the last few years, too, advisors now place more of an emphasis than ever before on a broker/dealer’s ownership structure (publicly traded, private equity backed, or privately held) and perceived ‘buy-out risk’ when evaluating options.”

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