Upfront money, transition bonuses and forgivable loans: They can be called a variety of things, but they all refer to the same thing — the capital a broker-dealer allocates to an adviser during the transition to their firm, in a forgivable form.
There are several misconceptions about the transition dollars being offered by independent broker-dealers in today's environment. Fueling the rumor mill are several misinformed quotes about what independent broker-dealers are currently offering.
First, let me start by saying that transition capital, for most independent broker-dealers, is meant to assist in the cost of switching from one firm to another. By no means is it offered as a way to monetize an adviser's practice the way it is at wirehouses. The sheer dynamics of the compensation between advisers and independent broker-dealers does not allow for the types of deals wirehouses can put together.
That said, upfront forgivable loans have morphed into something about which many advisers have false expectations. Stories have been written about independent broker-dealers giving transition checks up to 100% of an adviser's trailing 12 months' gross dealer concessions. These comments are incorrect and misguided.
Here is the reality: There are independent broker-dealers that offer forgivable loans to advisers in transition. While every firm handles this topic differently, there are general guidelines about what is being offered at the variety of broker-dealers that exist.
Small broker-dealers are firms that have less than 150 advisers. According to Meridian-IQ, there are 1,556 broker-dealers in this category. The overwhelming majority of these firms are privately held. This ownership structure generally limits the capital available for forgivable loans, however hard costs associated with the transition — such as registration costs, E&O and stationery — may be negotiated. Advisers looking to move to a smaller, more intimate firm of this size can expect an offer with little or no capital upfront.
Midsize firms are categorized having between 150 and 500 advisers. There are 71 independent broker-dealers in this category. The majority of these broker-dealers are privately held and, like the smaller firms, most do not offer upfront money. However, there are exceptions in this category. Midsize firms that are owned by a larger parent company or that have the means and desire to offer capital do exist. They are typically not offering the type of transition dollars the larger firms are able to offer. A general range for firms in this category is between 3% and 15% of an adviser's trailing 12 months' gross dealer concessions. Like the smaller firms, many midsize firms may be willing to pick up hard costs, as well.
Larger broker-dealers have more than 500 producers. There are 63 firms in this category ranging between roughly 500 and 14,000 producers. Most of these broker-dealers are offering some sort of transition capital, but the amounts can vary dramatically. The ranges we are seeing from large firms are between 15% and 40% of an adviser's trailing 12 months' gross dealer concessions.
In all three categories listed above, there may be outlier situations where more capital is offered, but these situations are not the norm.
The ranges given are based on three factors broker-dealers analyze to determine how much capital they will offer. The first is production. Generally, the higher the production, the larger the offer, but this is not always the case as the second factor plays into this. The second factor is product mix as it relates to an adviser's profitability for the firm. The third area that is taken into consideration is an adviser's CRD. If there are issues related to yes answers or credit problems, this may affect the percentage offered.
In our experience of transitioning thousands of advisers, we have found the happiest and most satisfied are those who choose a broker-dealer based on the balance between culture, fit and needs for their specific practice. While the cost associated with a move and the assistance a potential firm is willing to offer are both important pieces to the puzzle, advisers will be happier long term if they prioritize a variety of other factors as well.
Jodie Papike is the executive vice president of Cross-Search, a third party, independent broker-dealer recruiting firm that connects advisers with broker-dealers.