Wirehouse deals are at an all time high with transition packages topping out at 330 percent or more of trailing 12-months production for first quintile reps. Sure, the wirehouse wealth management divisions are still quite profitable. But everyone secretly wonders how much longer Merrill Lynch, Morgan Stanley Smith Barney and UBS will continue to toss off such enormous deals, considering the costly musical chairs of job switching that has ensued.
Some executives say that paying top dollar for top talent is still worth it. “For the right advisors who fit our culture and whose business is sound and in growth mode, the deals make good economic sense,” says Andy Saperstein, head of Wealth Management for Morgan Stanley Smith Barney. But making those deals work depends, of course, on the quality of the recruit, and the length of time he sticks around. In January of this year, Bob McCann, who was hired as head of UBS Wealth Management Americas unit a few months earlier, told this magazine, “Here is what I'm not interested in: Paying someone a lot of money and have them come in and effectively retire. I think some firms have made a mistake in the last few years by frankly paying too much for advisors, giving them far too much guaranteed money.”
The key for the firms is really the amount of transition money that is offered up front, in cash: the “at risk” piece. Everything else that he is offered has bogeys attached to it, so that both the advisor and the firm have skin in the game — if the advisor doesn't deliver the assets, then the firm doesn't pay the related backend bonuses.
So let's see what happens in a near worst case scenario for the hiring firm. A $1 million producer moves from one wirehouse to another, and gets paid $1.2 million in cash up front. But this recruit is only able to move 50 percent of his total assets to his new firm and, hence, by the end of 12 months, he is generating $500,000 in annual revenue. Here's how the math on such an outcome works. Because a $500,000 producer is paid at an approximately 40 percent commission rate, the firm earns $300,000. If we amortize the $1.2 million that was paid to that advisor over 10 years, that equates to a cost to the firm of approximately $120,000 annually. Subtract that from the $300,000 and net profit is now $180,000. Of course, there are costs associated with every advisor like recruitment fees, rent, technology, transition costs, etc., but the greater the scale the firm has, the lower these costs. So the actual profit may be smaller. But again, this represents an unsuccessful hire, and even then the firm turns a profit.
How to Get the Best Deals?
It takes a certain amount of educated guesswork on the part of management to predict which advisors are likely to be successful. The firms look mainly at the following:
- What is the advisor's business mix? (Firms love fee-based books but typically won't discourage transactional business as long as it is clean and compliant.)
- How many households does the advisor serve and what is the average client size? (While most firms prefer high-net-worth clients, they won't discourage an advisor from working with smaller households unless investable assets fall below the $100,000 mark. Then, the advisor could be looking at either a reduced payout on the revenue generated from those accounts or lose the ability to work with them at all.)
- Has the advisor moved before and, if so, how many times and when?
- Why does the advisor want to move? (Firms actually care a lot about why an advisor is moving, wanting to make sure that he is moving so that he can offer greater value to his clients, not simply to score a large personal gain.)
- Does the advisor have a clean compliance record?
- Is the advisor's business overly dependent upon one client?
- What sort of growth trajectory has the advisor exhibited over time and what does his trajectory look like going forward?
- Is the advisor a team player? Will he fit into the branch that he is looking to join? (You might be surprised to learn that there is a big premium placed on intangible factors such as “likeability.” This can skew the deal up to 20 percent in either direction.)
Recruiting is more of an art than a science, but, clearly, advisors who have the right kind of business get the biggest deals.
Will the Deals Go Higher?
I doubt it. And, I would be surprised if any firms look to put more “at risk” up front. In fact, if we use the first two months as a barometer, we can predict that 2010 will be a year of greater selectivity on the part of firms and financial advisors. But for the high-quality advisor looking to change firms, the road ahead is still paved with gold.
Mindy Diamond is President of recruiting firm Diamond Consultants.