It's approaching silly season again, also known as recruiting season. It's typically the time of year that the independent broker-dealer community introduces new incentives to tantalize wayward reps and advisers considering a new affiliation or custodian.
This year it seems the broker-dealer community rolled out new incentives earlier than normal. Things appear to be driven by wirehouses getting more aggressive in combating the independent exodus. Think of it as “The Empire Strikes Back” without the light saber and heavy breathing (well, maybe).
In our most recent recruiting discussions, we've come across bonus incentives ranging anywhere from 15% to 300% of a representative's trailing twelve months of production. We've also seen reports of wirehouses reporting bonus expenses ranging into the billions to be paid out in the future. Yes, folks, we're approaching a ludicrous stage.
With the deep pockets aggressively recruiting assets tied to wealth management teams, advisers need to remain cognizant of why they are being paid the bonuses in the first place: the broker-dealer intends to make a profit back from your book, and that profit will likely come out in their favor over the long term based on higher fees and ticket charges to you and your clients. It will also likely be attached to a long-term contract, in some cases up to 12 years, to ensure the broker-dealer recoups its initial bonus or forgivable loan.
Where does that leave regional broker-dealers already straining under the increasing burdens of compliance, supervision, regulatory oversight and the price pressures of an increasingly price-sensitive marketplace? It leaves them in a difficult spot if they are unable to differentiate their practice sufficiently or add value to the extent of their fee.
Regional broker-dealers, typically more cash poor than their larger brethren, that are indeed adding value and creating differentiating rep/adviser/client experiences, need to become more creative in how they compete in this arms race.
(More: Explore the B-D Data Center to discover which firms offer the highest payouts, have the most reps in the field, and generate the most revenue)
One concept beyond cash payouts that has seen some traction (see: Hightower) is offering equity in the firm or parent company to higher producing wealth management groups. Using equity rather than cash has the potential to have a higher payout in the long run without denting near- or even longer-term revenue. For instance, the MoneyBlock equity program does not impact an adviser's ticket charges, fee schedules or payout structure. The concept is to grow the business and equity value over the long-term for the benefit of all participants.
The limitations of equity offerings are readily apparent, though. Depending on how the program is structured, it may not scale beyond early-stage grants. It can also be dilutive to early-stage participants as more shares are granted, and nothing is guaranteed if the firm underperforms.
The advantages, though, include aligning the interests of wealth managers and their broker-dealer for the long-term. All participating parties have a seat at the table in driving the firm forward, and in ensuring the firm delivers quality products and services not just to its immediate clients (wealth managers), but to the ultimate consumer: investors themselves.
(More: Deepen your connection with clients with these 5 client trust-builders)
Do your homework before signing any affiliate offer sheet. Dig into the details to ensure you understand all of the costs you and your clients might be responsible for paying. Ask questions and understand any buyout provisions if your deal goes south or conditions change. It happens more often than you think.
And, finally, always remember that due diligence is a two-way street. Be sure you do yours.