Wirehouses challenged as retention deals fade

Study estimates that between 12% and 20% of long-term packages signed after 2008 mergers will expire annually over the next four years

Jul 18, 2014 @ 12:01 am

By Mason Braswell

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The next four years will present a final test of how well major brokerage firms have survived the rapid industry consolidation that followed the financial crisis, as the retention deals from 2008 and 2009 expire.

The long-term packages, which vary in length by firm, will be expiring at a rate of 12% to 20% per year between 2015 and 2019, presenting an opportunity for competitors to pick up top talent, according to a recent study from Cerulli Associates Inc., a research firm.

“Wirehouses are on the hook to prove their value to current advisers or risk losing them,” Cerulli wrote in its report. “For competitors, deal expiration represents a lucrative recruiting opportunity.”

Most of the deals were structured as upfront loans that are forgiven after a certain number of years. Much of the value has already been amortized, but some advisers still have around $100,000 or more that would have to be paid back if they left early, according to interviews with brokers and managers.

For example, UBS issued a retention bonus called the GrowthPlus Award in 2010 as it looked to stem the outflow of brokers, which reached about 17% per year. The firm has brought attrition down to around 3% to 4% since, executives have said.

Morgan Stanley's deal for ex-Smith Barney advisers it picked up as part of an acquisition from Citigroup had one of the longest retention terms, extending out to 2019.

A spokesman for Wells Fargo Advisors, Anthony Mattera, said the program his firm put in place, called 4Front, was structured as a bonus tied to performance.

Spokesmen at Morgan Stanley, UBS Wealth Management and Bank of America Merrill Lynch declined to comment.

Rival branch managers and recruiters have been making calls to prospects as the clock ticks down on the long-term retention deals.

Regional firms, such as Raymond James & Associates Inc. or Stifel Nicholaus & Co. Inc., are looking to pick up advisers who may have been at similar firms, such as A.G. Edwards, before ending up at a larger firm, such as Wells Fargo Advisors, in the aftermath of several mergers.

“The sun-setting of these deals will open up the marketplace,” said Peter Alberding, a Raymond James manager in Boston who left UBS Wealth Management earlier this year, before his retention package had fully amortized.

“A large number of advisers remember the times in the past when the firm's culture and values were aligned with the adviser's and their clients', and they are looking to find a home that brings them back to those times.”

Cerulli estimated that the independent space could benefit — nearly 40% of wirehouse advisers with $1 billion in assets said they would be interested in opening their own registered investment adviser firm.

Still, the top talent may not be as easy to scoop up as regional and rival wirehouse recruiters are hoping. Even some industry recruiters aren't as sanguine about the prospects, and deals have slowed this past quarter despite the continued amortization of those upfront loans.

Bill Willis of Willis Consulting Inc., who has done work for two of the four wirehouses, said he expects “one or two” extra departures over the next few years, but “not hundreds” who suddenly want to leave.

Wirehouse headcount and client assets have begun to stabilize after several years of losses. The four firms lost 6,000 advisers in the aftermath of the financial crisis, but now 80% of wirehouse advisers indicated they were very likely to stay with their firm in the next year, Cerulli said.

“Mega teams with more than $500 million in assets under management control 47% of the channel's assets and express the highest level of satisfaction with their firms,” Cerulli said in its report. “While efforts of the wirehouses to prioritize their top tier may have alienated some smaller, less productive advisers, the strategy has kept their most productive — and profitable — advisers satisfied.”

Another argument is that most of the people who really wanted out would have already left, as Mr. Alberding did. The deals have amortized to a “manageable level” where advisers who were interested in leaving could probably have overcome the remaining balance with a recruiting deal from a new firm, Mr. Willis said.

“There are people out there who aren't going to leave until the deal is gone because that's the way they are built, but I don't think there's a huge number of them out there,” Mr. Willis said. “I don't see a mass exodus; I don't see a gun going off on the day the deals expire.”

Transition packages can pay as much as 300% of a top broker's annual production, much of which is granted as an upfront loan, similar to the retention packages.

But a number such as $70,000, which may have been only a small fraction of the initial loan, is enough to make some advisers at least wait until next year, said a former Wells Fargo manager who joined the firm during the 2008 mergers, but has since moved to Stifel. He spoke on condition of anonymity because he did not have permission from his firm to speak on the record.

“It behooves any good manager, especially at a good alternative firm like Stifel, to make sure their story is out there, more-so than it was two or three years ago,” he said.

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