Big offer?

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Lex123's picture
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Joined: 2006-10-26

Ok. So I got offers from ML and MS.  The firms project that they are paying me in the 2.5X area.  They offers look great in theory, but there are so many variables and moving parts, I really have NO IDEA how the ACTUAL offer would be end up.  Yes, I know it varies, but does anyone have a recent experience how the reality compares to the promise.

troll's picture
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Lex123's picture
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Joined: 2006-10-26

Yes. But I it could be smoke and mirrors. The final value of the offer depends greatly on how much I bring over and how much gross I do, both of which are hard to guesstimate having never jumped ship before.

Morphius's picture
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Lex123 wrote:Ok. So I got offers from ML and MS.  The firms project that they are paying me in the 2.5X area.  They offers look great in theory, but there are so many variables and moving parts, I really have NO IDEA how the ACTUAL offer would be end up.  Yes, I know it varies, but does anyone have a recent experience how the reality compares to the promise.First, from a purely financial standpoint, recognize that what "the firms project" is going to illustrate only the best case scenario for you, just as most offers to new trainees always seem to illustrate only what the top few percent earn, not what you are likely to really earn.  So I'd ignore or greatly discount any/all "growth" assumptions they include.  Do your own projections, using your own more conservative assumptions.  Then be very clear about the vesting and timing of payments, since generally half or more of that "250%" is actually earned/paid on the back end, not up front.  How long do you have to stay to earn that?  What hurdles do you have to hit?  I'd really discount everything that isn't paid upfront to account for the uncertainty of ever getting it.A couple non-financial comments, though since unsolicited I'll keep them brief.First, be clear on exactly what you hope to accomplish by making any change.  Other than more money upfront and a different name on the door, do you hope to realize?  What could you do more effectively at ML or MS that you can't do now?  If you have any track record or reasonable book there will be potentially many, many offers to move.  Be careful of thinking your recruiter/potential new manager loves and appreciates you much more than where you are now - the grass is always greener syndrome.  If that is an important part of your consideration, be very careful.Second, assuming you have a strong reason to leave your current firm, realize that simply going with the flow and accepting a big waffle is NOT the only route and may not be the right move for you.  As you know, virtually all these deals come with a long term handcuff in the form of a forgivable loan over 5 years or so.  What happens if a year into your new gig you realize you've made a huge mistake and want out?  Do you really want to go that route?  If you do, at least have the discipline to not spend the unearned portion of the bribe - I mean waffle - so you retain the ability to buy out your deal and walk away with only the normal amount of incredible wirehouse hassle.  Too many lack that discipline and have no choice but to serve out their entire sentence, regardless.  Good luck.

Morphius's picture
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Morphius wrote:

Lex123 wrote:Ok. So I got offers from ML and MS.  The firms project that they are paying me in the 2.5X area.  They offers look great in theory, but there are so many variables and moving parts, I really have NO IDEA how the ACTUAL offer would be end up.  Yes, I know it varies, but does anyone have a recent experience how the reality compares to the promise.First, from a purely financial standpoint, recognize that what "the firms project" is going to illustrate only the best case scenario for you, just as most offers to new trainees always seem to illustrate only what the top few percent earn, not what you are likely to really earn.  So I'd ignore or greatly discount any/all "growth" assumptions they include.  Do your own projections, using your own more conservative assumptions.  Then be very clear about the vesting and timing of payments, since generally half or more of that "250%" is actually earned/paid on the back end, not up front.  How long do you have to stay to earn that?  What hurdles do you have to hit?  I'd really discount everything that isn't paid upfront to account for the uncertainty of ever getting it.A couple non-financial comments, though since unsolicited I'll keep them brief.First, be clear on exactly what you hope to accomplish by making any change.  Other than more money upfront and a different name on the door, what do you really hope to achieve?  What could you do more effectively at ML or MS that you can't do now?  If you have any track record or reasonable book there will be potentially many, many offers to move.  Be careful of thinking your recruiter/potential new manager loves and appreciates you much more than where you are now - the grass is always greener syndrome.  If that is an important part of your consideration, be very careful.Second, assuming you have a strong reason to leave your current firm, realize that simply going with the flow and accepting a big waffle is NOT the only route and may not be the right move for you.  As you know, virtually all these deals come with a long term handcuff in the form of a forgivable loan over 5 years or so.  What happens if a year into your new gig you realize you've made a huge mistake and want out?  Do you really want to go that route?  If you do, at least have the discipline to not spend the unearned portion of the bribe - I mean waffle - so you retain the ability to buy out your deal and walk away with only the normal amount of incredible wirehouse hassle.  Too many lack that discipline and have no choice but to serve out their entire sentence, regardless.  Good luck.

troll's picture
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On a few points, not all, i would respectfully disagree with Morphius. I am involved in recruiting for one of the wirehouses, and I am involved in these conversations all the time. Maybe what I know is specific to my area of the country, with different areas having different competitive conditions, but, in the Northeast, the deals right now are generally 180-230% of T-12, DEPENDING on what your business looks like, and about 70% of that is up front. Howeer, of te 70%, you will usually see about 20% in stock, that vests over a few years. These deals generally run 9 years. They are loans, forgiven in equal amounts over the 9 year period.
From what I see, with FA's that have left my branch, generally if you have solid relationships with your "A" and "B" book, you will take 75-80% with you, and that is what the back end part of the deal usually depends on.
Make sure you realize that for the first few months, and thats if things go well, you are going to be living off of the up front cash you got, because you will be focused on bringing over the money, more than putting it to work.
Usually when an FA makes a move like this, in my opinion, its about the check, even tho the FA will always have a list of things that he or she isnt happy about at their existing firm that "caused them to leave". Its more often than not about the deal. This is the wrong reason for you to make this move. All the things you arent happy about at your firm are  the same, at the other firm, and if they arent, there will be other things that are equally frustrating. I know this for a fact. We have people leaving all the time who end up being pissed off a few months later. I guess an argument can be made that they may be pissed off, but they have a million dollars in their bank account. Like I said, its almost always about the check.
There are really only three things you need to ask yourself
Is this move the right thing for my clients, my family and myself? If you can answer yes to all three, then go for the check. If not, you'll end up with buyers remorse, because it is a big hassle to move a book.

Morphius's picture
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Joined: 2007-07-21

Good post, pratoman, although I'm not sure how much we really disagree.  Obviously the 9 year deals you are seeing are longer than the ones I have seen in the past year, and your comment about 70% upfront is consistent with what I said about roughly half, since I wouldn't really consider the 20% stock an upfront portion since it doesn't vest upfront.  But those are deal details that will vary anyway, by firm, by type of book, and by area.Nor do I really disagree that most of these moves are all about the deal - the money.  The point I was trying to make was that I wish more people DIDN'T make this the decisive factor, because too often they'll be no more satisfied at their new firm than they were before they move, albeit with more money in the bank - but most of which they won't legally own for years yet.  Until then, that bank balance is like an escrow account almost.  In any event, I'm just amazed that more of those who move for the money don't really even seriously consider how much more money they could make over time by going independent in one form or another.  But that's a topic for a different post!

troll's picture
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Morphius - you are right, as I wrote the post I started to realized, and it was clear to me after I posted it, that we dont really disagree.
Great point about the up front stock not really being up front.
 
I really think, for MOST, not all FA's a wirehosue to wirehosue move for the check doesnt make sense. One thing that I think has been happening is that a lot of the recent uptick in these moves are a result of the stock price of the banks dropping so much, and FA's feel this is the only way they can make that money back.
 
Where I have to say it might make sense to take a check is say, an FA who is doing $1MM, feels pretty confident he can bring over enough assets to get the backend part of the deal, and has maybe 9-10 years left before he wants to hang up the spikes. Thats not a bad retirement plan.

Lex123's picture
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Joined: 2006-10-26

Let me be clear.  It's all about the check.  I couldn't be happier with my manager, my firm, my branch, my job.  I love what I do.  Things are going great now, but who knows about tomorrow?  The market could drop 40%.  I could get embroiled in an arbitration.  Who knows? Or I could take a check and have instant financial security. 

Morphius's picture
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Lex123 wrote:Let me be clear.  It's all about the check.  I couldn't be happier with my manager, my firm, my branch, my job.  I love what I do.  Things are going great now, but who knows about tomorrow?  The market could drop 40%.  I could get embroiled in an arbitration.  Who knows? Or I could take a check and have instant financial security.  I understand your viewpoint, lex.  It's a common one shared by many in the industry.  And it is awfully tempting to take a big check to move, for sure.Having said that, I don't agree that taking a waffle really amounts to "instant financial security."  It may well seem like it when you deposit the check, but when you realize how many years it will be before you legally "own" that money, that's a little bit longer than "instant" in my opinion.  Remember, taking a waffle leaves you with all the same uncertainties about tomorrow you cite (market dropping 40%, arbitration) PLUS an unknown about your new manager/firm/branch.  At least now you CAN make a move reasonably easily if you need or want to; once you take an offer with a large forgivable loan that vests over 5-9 years, your options become much more limited.  Unless you have the discipline to keep that unvested portion on hand  to repay if you exit early (as few do), you're stuck until your loan is forgiven.  If that's OK with someone - no problem ... take the money and run.  But it's not right for everyone.Here's my point: I KNOW it's typically all about the deal - the check.  I'm just saying that those who leave a good situation simply because of the check might find themselves with plenty of time to wonder if the money really was worth it.  Remember, there ain't no such thing as a free lunch. 

Lex123's picture
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Joined: 2006-10-26

Morphius -- please stop offering such sage advice.  You could potentially cost me and my family a lot of money! 
 
On another front, I heard that you have to pay INTEREST on the forgivable loan.  What's that all about?

Cowboy93's picture
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Joined: 2005-05-10

To keep the IRS happy, the firms have to make it look like a loan, so they "charge" you interest. Each year when a slice of money becomes vested (or part of the loan is "forgiven"), you'll have a pro-rated portion of the upfront tacked onto your W2 income. However, the imputed interest is also included on your income.

For example--you get a $500,000 upfront payment with a 5 yr forgiveness schedule. The first year you have $100,000 forgiven...but the W2 will show some higher number that includes interest (let's say $120,00). I believe the interest is on the whole balance since it is the "outstanding" loan.

Granted, this sucks, especially if you didn't know about it beforehand...however, even if they tack on $20k of income every year, the taxes on that are maybe $8k/yr? So, of the $500,000 upfront you have to subtract maybe $40,000 to account for this fact. Not chump change, but still a $460,000 lump (before taxes, including FICA/medicare, etc). Remember that none of those taxes have been paid when you get the check either, but they'll come due as well.

I think if you don't screw up with the net cash (after taxes, living off for a few months, etc), you are right to consider what a great impact can have on your family's security.

Moneyman13's picture
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Lex123 wrote:Let me be clear.  It's all about the check.  I couldn't be happier with my manager, my firm, my branch, my job.  I love what I do.  Things are going great now, but who knows about tomorrow?  The market could drop 40%.  I could get embroiled in an arbitration.  Who knows? Or I could take a check and have instant financial security. 
 
And be a wh re to the new firm for the rest of your life, or at least the 7-10 years they want you to sign your life away.
 
If you have a good book, and you want to make more money, go Indy and you will never be sorry. I have met so many that left a firm merely for a check and it was the worst decision they ever made! The money is cursed. Plus, honestly more and more money is going to indy's than a wirehouse, people are getting smarter about all the fees and expenses with having their money at a wirehouse as just "another account along with the thousand that that broker tries to manage" Good Luck

troll's picture
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Cowboy93 wrote:To keep the IRS happy, the firms have to make it look like a loan, so they "charge" you interest. Each year when a slice of money becomes vested (or part of the loan is "forgiven"), you'll have a pro-rated portion of the upfront tacked onto your W2 income. However, the imputed interest is also included on your income. For example--you get a $500,000 upfront payment with a 5 yr forgiveness schedule. The first year you have $100,000 forgiven...but the W2 will show some higher number that includes interest (let's say $120,00). I believe the interest is on the whole balance since it is the "outstanding" loan. Granted, this sucks, especially if you didn't know about it beforehand...however, even if they tack on $20k of income every year, the taxes on that are maybe $8k/yr? So, of the $500,000 upfront you have to subtract maybe $40,000 to account for this fact. Not chump change, but still a $460,000 lump (before taxes, including FICA/medicare, etc). Remember that none of those taxes have been paid when you get the check either, but they'll come due as well. I think if you don't screw up with the net cash (after taxes, living off for a few months, etc), you are right to consider what a great impact can have on your family's security.
 
 
This is not how it works.  True the upfront payment is structured as a forgivable loan for tax purposes, but not to keep the IRS happy.  It is done to stretch the tax bill out over the life of the contract.  The reason that interest is charged on the loan is if you leave before the end of the contract, you have to pay back the "unearned" portion and interest is charged until you do so.  While you are still in good standing, the interest charged is offset by interest paid.  Interest paid is typically a tiny bit over interest charged actually leaving the broker with a couple dollars of earned interest.  If your upfront was $500m on a 5 year contract, $100m each year plus a couple dollars hits your w-2.

Cowboy93's picture
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Interest paid on what to whom?

The keeping the IRS happy part is that they have to CHARGE interest or it doesn't pass the sniff test---in other words, to keep the spread out for income purposes, it has to look and feel like a loan (vs. a bonus).

I am living this so I am quite familiar w/the terms---but I do think the IRS may have tightened up how the forgivable loan is structured. Perhaps in the old days the firms charged a very nominal amount of interest. But these days it is more market like (say 5%/yr).

troll's picture
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Joined: 2004-11-29

Let's make this easy.  $600m upfront bonus, 5 year contract, 6% interest (does not matter what rate you use).   Each month  approx $11,600 in income  hits your w-2.  However there is a pretax deduction of $1600 taken off your check.  Net to the broker, $10m taxable income on money he already has, to the firm $1600 in interest paid and $1600 deducted net of $0 (although it comes out a couple of dollar in the broker's favor).  Again they do this in case you leave, they stop crediting the $1600 offset and now you owe that amount.   Point is there really isn't interest paid or accrued, this is done because if you leave, you have an interest bearing loan to pay back.  I'm really not an accountant so I cannot tell you why it is done this way.

troll's picture
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Cowboy93's picture
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Agreed...and the language in the docs says "this doesn't guarantee employment, blah blah blah." Which means that hypothetically they could can you if you don't work out the way the hoped AND still say you owe them the unforgiven part of the loan...no firm wants that to happen---they want you to bring over everything and make a ton of money for them. BUT, that's what the contract says. Now, for someone who jumps ship in the middle of deal, I think the lawyers tend to drag out the negogiations for awhile and settle just before they go to arbitration. Best option if you go this route is to make the move work and suffer through the deal if it doesn't.

tired's picture
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Joined: 2008-06-05

   Lex123

                Would you or anyone else care to share what the offers are in more detail along with contract length and any additional items to negotiate for?
      I'm part of a 2 member team at a major wire house. We are growing and have 300mm in assets doing over 2 million...Our business is really being phased out at our current firm..
 
      Thanks for any help.....Tired

troll's picture
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Tired
In the area I am in, TRISTATE NY, you could get over 200% of t-12. Deals are 9 years.
I think something like 150% up front, with about 70-80 % of that cash, the rest stock. Then bring over a % of assets (think its 80% dont recall, i should i recruit, but i have it written down in the office) within 14 months, or something like that, and you get the other 50%.
 
The deals can be structured differently, open to negotiation, and if you do a lot of fee based, you might get more like 225%
 
If you have more questions, feel free to PM me.

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