Wirehouses sweeten succession deals for retiring advisers

Facing increased competition from other channels, the big four focus on updating their succession programs this year

Mar 17, 2014 @ 11:10 am

By Mason Braswell

As competition for the assets of retiring advisers heats up, the wirehouse firms have been updating their succession programs for aging advisers.

This year, the big four are knocking the dust off old succession programs and revamping them with new names, higher payouts and lower barriers to entry.

“The programs are much more robust than they were five years ago,” said Corey Kupfer, a partner at the Hamburger Law Firm. “The wirehouses have been reacting to competitive pressure from the independent RIA and broker-dealer space, and with the aging of the adviser population, they've really stepped up with new programs.”

As the average age of advisers climbs into the 50s, the stakes are high for all firms. Almost $2.3 trillion in assets — more than the total assets under management at most of the wirehouses — are held by advisers already over 60, according to 2012 data from Cerulli Associates Inc.

(Don't miss the latest on succession planning in this Special Report)

That pain is especially acute at the wirehouses where 30% of advisers are planning to leave the business in the next decade, a separate Cerulli report from last year states.

“There is noticeable uptick in the number of advisers keenly interested in this,” said John Alexander, a managing director for strategy and channel development at Wells Fargo Advisors. “A lot of advisers are asking for advice about the best way to do it, so we're developing resources and putting a great deal of capital into it as well.”

The basic processes for retiring at a wirehouse are similar across the firms. They all aim to provide retiring advisers who meet certain criteria a share of the total revenue from their book for up to five years after they retire.

The wirehouses also have been refining that original plan, and adding more flexibility and options in recent years as new channels come into the marketplace.

“From an RIA perspective, roll-up firms are poaching from the wirehouses, as well,” said Alois Pirker, the research director at Aite Group's wealth management consulting unit. “The employee firms have been somewhat idle there and not so aggressive, and so I think they have realized there is a need in that space.”


Payouts at the wirehouses have been steadily increasing and this year reach as much as 250% of an adviser's book of business, depending on length of service, size of the book and other firm metrics.

Advisers at higher end of the range are generally serving on a team, are 55 or older, have been with the firm for a good part of their career and have a number of fee-based accounts and younger clients.

Morgan Stanley is updating its Former Financial Adviser Program this year to provide additional payouts to both lower producing and top-tier advisers. Advisers who are in its top two clubs – meaning they meet certain production and length of service requirements – and are on a team are eligible to receive a payout of 50% of their trailing-12-month revenue, paid as a lump sum pre-retirement, in addition to post-retirement incentives, according to a person familiar with the changes, who asked not to be named because the plan update has yet to be announced to the firm's 16,000 advisers.

(Related: How switching firms before you retire can provide an extra windfall)

Bank of America Merrill Lynch's original Client Transition Program paid out between 70% and 80% of trailing-12 production over four years, but it was updated for 2013 to pay up to 160% of trailing-12 with a minimum of 100%.

The payout is matched with where the adviser falls on the production grid. For example, a $1 million producer at a 45% payout rate will take home 45% of the total amount being offered for the book of business. If the same adviser qualified for 200%, he or she would be paid $900,000 divided up over a set number of years.

The payouts are still somewhat lower than the independent space, where the income is often taxed as a capital gain rather than as ordinary income, but the wirehouses benefit from the structure and sense of stability the programs provide, according to Ryan Shanks, founder and chief executive of Finetooth Consulting.

“Nine times out of 10, you're going to get more on the independent side,” Mr. Shanks said. “But will the clients come with you? And if you are going to monetize on that level, are you comfortable putting the baton in someone else's hands and walking away?”


As wirehouses encourage their advisers to team up, they're also doing more to bolster the partnership between the retiring adviser and his or her successor.

“In the wirehouse space, it's really sort of a three-part discussion between the seller, the buyer and the firm,” Mr. Kupfer said.

Morgan Stanley requires its advisers to have been on a team for at least one year. Merrill Lynch's program is not open to any advisers who have not been on a team for three years.

UBS Wealth Management Americas' Transitioning Financial Adviser Program provides for a five-year payout, but two of those years are spent in the office in a consulting role, helping clients get to know their new adviser. The retiring adviser spends the last three years out of the office.

In the end, UBS advisers in the program are eligible to receive up to 180% of trailing-12 production paid out over that time. More than half of the 7,100 advisers at the firm are already on a team and there are around 214 advisers in its succession program, according to Jason Chandler, head of the Wealth Management Advisor Group.

“We expect that number to grow in the future as more people think about the later stages of their career,” he said.

(More: Wirehouses, RIAs benefit from bonus disclosure at expense of smaller B-Ds)

Morgan Stanley's update, which is set to take effect midyear, will offer enhanced payouts to lower-producing advisers who join a team. The retiring adviser will lock in the grid payout rate of the top producer on the team for the years during and after retirement.

Wells Fargo Advisors' program will pay up to 160% of trailing-12 revenue, but the advisers already on a team have the option to negotiate a higher payout with the partner who is taking over the book. In that case, Wells Fargo will provide a loan to the inheriting adviser for up to 200% of the departing adviser's book value.

“There's definitely an incentive for you to plan ahead,” Mr. Alexander said. “We're not mandating it and you can still come up with a plan if you don't, but you have more control and flexibility if you're in that relationship for at least a year.”

Mr. Alexander this year helped the firm change the name from the Sunset Program to the Financial Adviser Succession Program to make it feel more like a transition and less like an ending.

“From feedback that we got from our financial advisers and branch managers, one of the things was that the name we had called it, Sunset, was to some people a beautiful scene of the sun going down,” he said. “But to other people, I don't think it sounded quite as beautiful.”


Firms have not only moved to raise payouts in effort to retain advisers, but they are also lowering the thresholds for entry into their succession plans to make it easier for recently recruited advisers to take advantage of the program.

Morgan Stanley's plan, for example, has one of the lowest length of service requirements at three years.

Mr. Shanks of Finetooth Consulting said that he had been asked by Morgan Stanley to find recruits, even in the independent space, who are near the end of their career and would take a buyout offer.

(More: Internal or external succession: What's right for you?)

Part of the appeal for some of the independent advisers is that one of the wirehouses may offer to take over the lease, brand the team's advisers under a group title and take over payroll and other responsibilities that the adviser wanted to be sure were taken care of when he retired.

Advisers already at the wirehouses are generally receiving large offers, but should still be careful to consider how much they are being offered and compare that with offers at other firms or other channels, Mr. Shanks said.

“You need to understand the competitive landscape and how it would compare with something different,” he said. “And [sometimes] you could monetize at a substantially higher rate, but it requires to you make that move and transition clients.”


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