RIA principals are very interested in wirehouse advisors—interested in recruiting them, that is. But that takes some finesse. At this morning’s Schwab Advisor Services workshop for advisors in the New York area, RIA principals and consultants discussed strategies for wooing and hiring advisors from various different kinds of firms.
Bringing on breakaway brokers is more challenging than hiring an already independent advisor working for an affiliated broker/dealer, said John Furey, founder of Advisor Growth Strategies, an RIA consultant. For example, the structure of wirehouse compensation is very complex and that makes it difficult for RIA principals to come up with a fair compensation comparison.
Furey says RIA principals should emphasize the superiority of the RIA compensation model when pitching to a potential breakaway broker. But that means having a full understanding of wirehouse payout structure and being able to explain the difference. He says the typical breakaway broker will see a revenue increase of about 120 percent after joining an RIA. (A significant portion of that increase is due to the fact that wirehouses pay advisors based on their “production credits” and not on the actual revenues the advisor generates.)
Furey points out that private bank brokers (like advisors at JP Morgan, for example) are harder to hire, because their assets are much stickier and harder to move from one firm to another. “Investors in this segment are involved in many relationships beyond just the banker. There’s a trust officer he works with, a credit loan officer, a portfolio manager and so on. It’s going to be more difficult to bring over those kinds of assets,” Furey says. Typically, a bank broker will bring just 10 to 20 percent of his book of business.
On the other end of the spectrum, Furey said independent b/d advisors are more favorable recruiting targets. “For one thing, they’re already independent for the most part,” he said. And he adds that independent reps understand the economics of the independent model, making it easier to discuss compensation and long term enterprise value with them.
One advisor says her firm has been on the hunt to add breakaway brokers for some time but that agreeing on compensation terms is a major hurdle. “The wirehouse brokers we have interviewed all expect at least 12 months of guaranteed compensation. Now, I’m thinking it should be more like three,” she says.
One message that was emphasized by all three speakers including Furey, Gabriel Garcia, managing director, Business Consulting at Schwab, as well as Thomas D. Giachetti, a Wall Street Securities lawyer: never offer equity upfront. Giachetti advised strongly against it and said there should be a get-to-know-you period before a firm gives up any portion of its equity to a newcomer. And if equity is offered upfront, then RIA principals should make sure they have the option to call the equity at any time.