2013 will be an active year for broker recruiting. The number of advisers and assets that change hands will comfortably surpass 2012's numbers. Several factors will drive this uptick in momentum. First, the nine-year retention awards rolled out in January of 2010 continue to amortize. Retention awards ranging from 30% to 50% of trailing 12 will not prevent advisers who are dissatisfied with their firms from hitting the bid elsewhere. Wirehouse packages, for example, range from 100% to 150% upfront plus generous back-end bonuses that can lift total potential packages to as much as 250% to more than 300%.
As retention awards continue to wind down, independence becomes a more feasible option for many. Cerulli reports that in 2011, fully 44% of advisers who left wirehouses went independent. 37% moved to another wirehouse and regionals snagged 13% of wirehouse defectors. As independence continues to evolve from an exotic, trailblazing choice into an increasingly familiar alternative, more wirehouse advisers will choose this path. Similarly, more advisers will join user-friendly regional firms.
Cerulli predicts that wirehouse market share will drop from 41% of retail assets to 34% by the end of 2014. Despite the recent fiscal cliff follies and the looming debt ceiling showdown, advisers remain upbeat. Investors are just beginning to return to stocks, after missing the first three years of a raging but volatile bull market. Many are hopeful that the trend will continue throughout 2013.
Meanwhile, FINRA's consideration of a proposal that advisers disclose the details of upfront recruiting bonuses to their clients, is at best an irrelevant sideshow. Advisers who are convinced that there are better firms for themselves and their clients will not hesitate to transport their businesses. Only weaker players with shaky client relationships will be scared off. In fact, for most advisers, sharing the details of their signing bonuses at a new firm, will only confirm their rock star status to clients.
We're in a Goldilocks market environment--not too hot and not too cold. This is the type of scenario that favors broker movement.
Recruiting deal outlook
In our view, deals will remain at their current stratospheric levels throughout 2013. Basic broker demographics continue to fuel this trend. The adviser population is stagnant and aging. There are just under 320,000 advisers in the US whose average age is 50. Cerulli reported that the adviser population declined by 2.3% in 2011. Older advisers often aren't willing to undertake the hassle of a move.
Barriers to entry for new financial advisers remain high. Despite lengthy mentor programs, in our experience less than 15% of trainees succeed in establishing a viable business. Meanwhile , options for advisers continue to expand. Regional firms have stepped up with more compelling recruiting packages and the migration to independence continues to grow. Demand for advisers who control pools of client assets has never been so intense. Treacherous markets and regulatory changes have led Wall Street firms to pare back their investment banking and trading departments. Never has a well run retail operation been so valued.
However, we believe that wirehouse deal levels have peaked. That's because in order to ensure that their recruiting deals are profitable, firms have had to extend the term of their contracts as they offered ever more dazzling packages. We don't think that enough advisers will sign deals longer than the current nine- to 10-year upfront term to allow firms to stretch them out any further.
Mark Elzweig is the president of Mark Elzweig Co., Ltd., a national executive search firm providing recruiting services to the asset management community.