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Edit letter March 2010

How Profitable Is Recruiting Really?

Registered Rep. columnist and professional recruiter Mindy Diamond, of Diamond Consultants, has written a must-read article for any advisor who is thinking about switching firms. She concludes that the rich deals of 2009 will still be on offer in 2010 — for the right book. As you know — and have read in these pages many times — in 2009, the sign-on-bonus deals (promissory notes, really) touched the stratosphere, approaching 300 percent (and sometimes more) of trailing production for the best books of business.

We have often thought — among ourselves, sitting here at Registered Rep., distant from the wirehouse executive suites — that the deals were getting silly, and would not be profitable for the acquiring firm down the road. Mindy, in her story on page 17, shows how the recent rich deals actually do make sense — or have been making sense, especially since the forgivable loan times have been getting longer, sometimes reaching nine years. So, she is right in her analysis.

During bear markets, trainees have less of a chance of being successful. To grow an advisory force, you're forced to either acquire another firm or buy individual FAs. It's cheaper that way. And so, firms have been furiously recruiting FAs. That makes sense, because there are empty desks (excess capacity) at brokerages — perhaps around 10 to 20 percent at any given time, estimates Andre Cappon, of The CBM Group, an industry consultant. But when you have to start ramping up fixed costs (adding new desks, offices, support/back office staff) and approach 100 percent capacity, those current rich recruiting deals will certainly have to come down.

The question is: When will that be? When will these deals peak? Management at a couple top firms have told us the firm-switching by FAs has already cooled off in the last few months. January's numbers from Discovery Database tell a different number, and, by my calculation, if January's movement numbers are annualized, why, you'll get the same or more of the movement you got last year. And last year, about 22,000 advisors (from all models, wirehouses, IBDs and RIAs) switched firms. If you reckon there are about 100,000 actual “real” FAs out there (as in discounting the licensed-but-not-producing rep), that's a serious amount of turnover (22 percent).

So, if you are thinking about moving, you best get on it. The current 200-plus production is not sustainable — unless we enter another bear market. The firms have already said they are re-focusing on training novices. The trainee survivor rate (making it past year three) is just 20 to 25 percent, Cappon estimates. And about 10 percent of established advisors switch firms on average per year, Cappon surveys show.

So, yes, aggressive recruiting will continue but only not so furiously. Just which veteran FAs are coveted? For answers, turn to Mindy's story. But I would like to add my two cents. If your length of service is in the fifth or sixth year, you are ripe for getting recruited. Says Cappon, “In year, say, six, an established advisor has automatic growth left in him On average, if you are at LOS 10 or 20, you're cruising, and, if you are at LOS 30, you're wasting asset.” Why? “His clients are retiring or dying or going away and he may not have energy to replace them,” Cappon reasons. “They retire on the job. So you want to get people in the early stage of the careers, when they have potential. That's the best time to acquire talent.” The only question is: How much to pay as a sign on bonus?

I'd love to hear from you on the sanity of the deals and get more details of the types of books getting recruited. My email is below.

(We thank you for your support. Drop us a line with your comments: 249 W. 17th St., New York, N.Y. 10011-5300. Or email us: [email protected]. Publisher Rich Santos can be reached at [email protected].)

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