One of the great “mysteries” to many in the independent RIA community is why more advisors at broker-dealers haven’t been breaking away to start their own independent firms. Yet a look at the recruiting landscape at broker-dealers helps to explain why: because top brokers, particularly at wirehouses, can get paid as much as 3X trailing revenue just to switch broker-dealers, in a world where the going rate for an independent RIA is “only” 2X revenue!
The caveat, however, is that the typical broker-dealer recruiting deal comes with far more strings attached, including an “upfront” payment that is actually a forgivable loan, and back-end bonuses that are paid out over time… all of which are only actually “earned” as the broker continues to hit specified asset and revenue hurdles on the new broker-dealer platform.
However, in a new FAQ regarding the details of the upcoming fiduciary rule, the Department of Labor has now declared that asset and production thresholds to earn recruiting bonuses are considered an “acute conflict of interest” that cannot merely be mitigated and must be avoided. In other words, all the typical contingencies that broker-dealers attach to the back end of recruiting deals will be banned in the future.
As a result of the announcement, broker-dealer recruiting deals have ground to a halt, as broker-dealers need to substantively re-assess what they can realistically pay for recruiting in a world where the broker can’t actually be held accountable for whether or how many clients come along in the switch. And while eventually recruiting deals will likely come back, the inevitable conclusion is that the typical payout rates for broker-dealer recruiting (at least for the retirement portion of the business) must fall below the typical purchase price of an independent RIA, which from the buyer’s perspective will now be a much “safer” purchase.
More broadly, though, the pressure on broker-dealer recruiting deals will also likely become pressure on broker-dealers themselves – particularly the wirehouses who historically have relied the most on recruiting and retention bonuses, but now may increasingly struggle to attract their top, most growth-oriented advisors, who in the future may “need” to become independent RIAs to maximize the value of the advisory business they build. Which in turn will be a boon to the vendors who serve independent RIAs, and those who provide “waypoints” in the transition (like Dynasty and HighTower)… unless the leading broker-dealers can transform themselves into RIA support platforms that retain the value of their business, while simultaneously allowing advisors to retain the value of theirs.