Wall Street recruiting packages have continued to soar in the past year. But insiders say the deals are not always what they seem. These days there are a lot more strings attached and in the current market they’re not great for brokers or firms.
The numbers are impressive: Depending upon the firm and the broker, the total value of a deal can reach as much as 350 percent of a rep’s trailing 12 months’ production, says Rick Peterson, president of Rick Peterson & Associates, a Houston-based industry recruiting firm. “In a couple of cases, I’ve seen it hit 380 percent,” he says. And the up-front portion a top broker recruit can receive has risen substantially because firms want to make up for deferred compensation that will be lost when the broker leaves his former wirehouse firm, he explains.
But while the value of recruitment deals has doubled over the last several years, Peterson says, so, too, has the length of service firms require before deferred compensation vests—now typically in the range of nine to 10 years. What’s more, recruits are expected to quickly ramp up production to levels they were generating at their previous firms in order to receive certain growth bonuses that are built into the recruiting packages. The problem is, in the current market, ramping up production is no easy feat, and Peterson says relatively few recruits are able to do it. “Many branch managers have told me hitting these bonuses is unrealistic in this market,” he says. That means they’re often getting a lot less recruiting money than they bargained for when they made the switch. (A CEO of the brokerage unit of a wirehouse, who requested anonymity, agrees, saying these days few recruits hit their targets and score their entire recruiting package.)
As a result, recruiting in the industry is down at least 50 percent over the last year, Peterson says. “The disastrous market has seen many advisors switching firms or leaving the business altogether, and their accounts are often inherited by their peers,” he says. “However, the ‘new’ advisor can’t jump ship just as he is getting to know these clients, particularly when they’ve just been hosed by the awful market. Why would they follow a new broker to another firm right now? These reps have to stay put until they earn these people’s trust.”
Another reason recruiting is down: “The market is so horrible that many clients want to stay in cash,” Peterson says. “There are fewer clients and there’s less money to invest.” Indeed, while the number of U.S. millionaires peaked at 9.2 million in 2007, according to the Spectrem Group, a Chicago-based financial research firm, it plummeted to 6.7 million the next year as stock prices and real estate values tumbled.
What’s more, many top advisors are chained to their current firms under recent retention deals that won’t vest for some time, he says. “Moving is a huge amount of work and it’s not always financially justifiable. Many reps want to wait until they have less of their retention deals to pay off. I don’t see recruiting improving until the first quarter of 2011.”
Bad For Brokers, Bad For Firms?
Chip Roame¬, managing principal of ¬Tiburon Strategic Advisors, an industry research and consulting firm, says the recruiting deals might not ever be a winning proposition for the firms that offer them. (Not so, one high-ranking executive of Morgan Stanley Smith Barney told Registered Rep. columnist and industry recruiter Mindy Diamond.) Roame¬ says that for wirehouses as a group, hyper-recruiting deals are “a pretty ridiculous business model. If they spent that money supporting their existing top FAs, those folks would be happier and less likely to have reason to move.” Or, if they redeployed the same money on a higher payout, the mass exodus to independence probably wouldn’t have happened, he says. “But, with the recruiting payment model as it is, I think many FAs will just keep moving to new firms when their contracts end,” Roame says.
On the other hand, no single wirehouse can opt out of the game as long as the others are paying out huge packages. Roame says, it’s a bit of an arms race: “If Wirehouse X says, ‘We no longer offer substantial upfront money,’ I assume they’d recruit zero high-end FAs. And their own advisors will still get picked off. So, is it smart and economical to offer these packages? No. But can a single firm end it? Not unless the other firms were certain to quickly follow suit."
Roame says branch managers are also on the losing end of the giant recruiting deals. “The cost of the integration and exit of FAs is substantial in just negotiating time alone,” he says. And it becomes something of a hopeless cycle: “Branch managers get an override on a recruited rep’s production, so they get income for a while. If the rep leaves because he doesn’t validate [meet their asset and production quotas], then the manager’s income goes down and he has to recruit someone else.” And while spending that time helping a loyal group of FAs may very well increase branch productivity, “Loyalty is too often fleeting when another firm offers you a check for 300 percent of 12 months’ trailing production.”
“It all depends on the individual deal,” said one wirehouse BOM in New York, who asked to remain anonymous. “But, I don’t think it’s working as a whole. Because of the desperation to recruit, firms have been overpaying. [UBS Wealth Management head] Bob McCann admitted that 75 percent of the brokers his firm hired earlier through these deals did not hit their numbers. They overpaid for these guys at the worst time, and now they’re bleeding red ink.
“How much you pay must be linked to what you believe a rep’s future flow of income will be,” the branch manager continues. “Some firms are giving reps 2.5 to 3 times what they are worth. I think they’re losing money on these deals and they know it, though they don’t want to admit it. As managers, they want us to wine and dine other firms’ brokers—and not to even take our own people out for burgers. It’s just bad business.”
Says another wirehouse BOM in the northwest, who also asked not to be identified: “The extra upfront money these deals offer provide ways for reps to buy themselves out of retention deals. But, if they accept it, they’re required to stay for a long time to receive the full payout. And, they must validate within a certain period of time to benefit financially, which for many isn’t realistic in this market.”
The BOM continues, “What’s more, switching firms has a lot of downside. Reps will lose clients. They have to get to know a new company and a whole new way of doing things—and then get their clients to do the same. Right now, a lot of reps don’t think it’s worth it.”
Another anonymous wirehouse branch manager based in the south says, “The deals may give you leverage with reps who are truly unhappy. But most good reps aren’t moving right now. I think it makes more sense to help your top producers grow their businesses than to recruit in this economy. Hopefully, things will improve soon. If we don’t constantly increase branch production—and recruiting is a big part of that—our jobs are in jeopardy. And, unfortunately, that’s the reality for many managers right now.”