Independent broker-dealers open up their coffers as fight for talent turns fierce

One factor was the competition for NPH advisers as IBDs record double-digit increases in the amount spent on forgivable loans

Mar 28, 2018 @ 2:54 pm

By Bruce Kelly

While the wirehouses have dramatically pulled back in recruiting new brokers, broker-dealers that pay reps as independent contractors are spending like crazy to hire new talent.

A key metric for broker-dealers when recruiting new brokers and advisers is the amount they spend on forgivable notes or loans, which firms pay advisers both as a signing bonus as well as a way to defer the cost of moving their businesses to a new broker-dealer.

Leading independent broker-dealers including LPL Financial, Commonwealth Financial Network, Cambridge Investment Research Inc. and Raymond James Financial Services reported in recent annual filings with the Securities and Exchange Commission sharp increases in forgivable loans, which usually run three to eight years. They are forgiven as the adviser meets conditions of the loan, such as generating certain amounts of revenue for the new firm.

In 2017, LPL's forgivable loans climbed 17% to $159.9 million, according to its recent Focus report with the SEC. A year earlier, LPL reported $136.7 million in such loans.

Commonwealth reported $37.6 million last year in forgivable loans to advisers, an increase of 27.9% over a year earlier when it reported $29.4 million of such loans, according to SEC filings.

Forgivable loans to reps at Cambridge last year increased 19.1% to $29.9 million, compared to $25.1 million in 2016, according to the SEC reports.

Ending its fiscal year in September, Raymond James Financial Services Inc., the independent contractor broker-dealer for Raymond James Financial Inc., a holding company reported it had made commitments of loans to advisers totaling $77.8 million, an increase of 55.6% compared to a year earlier, when it offered $50 million of such loans, according to the SEC filings.

Meanwhile, Ladenburg Thalmann, a network of four IBDs, in its recent annual report for 2017 said that it issued $27 million of notes to newly recruited financial advisers last year and had another $13 million targeted for the first three months of this year. It was not clear how much the firm spent on such notes in the prior year.

"During 2017, we have experienced a significant growth in the level of recruitment of independent financial advisers," the company said in the report.

Amy Webber, president and CEO of Cambridge Investment Research, said that firms last year were chasing brokers and advisers formerly registered with one of the broker-dealers at National Planning Holdings, a network of brokerage firms with 3,200 advisers bought by LPL last August for $325 million. Since then, LPL has said it retained about 2,000 of those advisers, so roughly 1,200 have scattered to competing firms.

"Last year, the competition was fierce, and a lot of it was driven by the NPH deal," Ms. Webber said.

And as competition among firms increased, it drove up the size of some recruiting deals, adding to the overall growth in that expense, Ms. Webber added.

The increase in spending to recruit new advisers by independent broker-dealers comes at a time when large institutions are pulling back from recruiting because it is expensive. UBS Wealth Management Americas in 2016 said it was scaling back on recruiting to instead focus internally on existing brokers. A year later, Merrill Lynch and Morgan Stanley followed UBS' lead, announcing similar moves.

The Department of Labor's fiduciary rule had an impact toward reducing bonuses to Wall Street wirehouse advisers but has not hit brokers in the independent channel as hard.

The rule, parts of which are being rolled back, requires retirement advice providers to act in their clients' best interests. The DOL made it clear that bonuses contingent on meeting production goals — a long-standing and common measure of recruiting plans — are forbidden under the new rule.

But forgivable loans for a broker who works as an independent contractor are far less than an employee at a large wirehouse or regional firm. Forgivable loans for independent contractors typically range from 15% to 25% of an adviser's annual fees and commissions, while a wirehouse adviser in the past could get a forgivable loan of 200% or more of annual gross production.


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