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Merrill Lynch released a new broker recruiting deal a few weeks ago—with two major changes. First, Merrill made it much harder for recruits to leave the firm: To receive all of his recruiting bonus money, a new hire must now stick around for 14 years, instead of nine, and all of the back-end money is now deferred, where a big portion used to be in cash. Second, the firm is now offering recruiting bonuses to small advisors (fourth quintile production) from some regional firms, several recruiters told Registered Rep. Both moves reflect the intensity of competition in the current broker recruiting environment.

Merrill Lynch did not return multiple emails and calls requesting comment on the new recruiting deals.

The absolute maximum deal Merrill will offer remains at 360 percent of production, but there are now seven back-end bonuses on the deals instead of five, with deferrals of five to seven years on each. That means it takes 14 years to collect every last penny. Basically, Merrill borrowed 20 percent from the upfront portion of its maximum deal and stuck that on the back-end. An advisor can now get upfront money equal to 120 to 130 percent of on-board gross production (trailing 12 months production at the time of hire), down from an absolute maximum of 150 percent. On the back-end, advisors who hit certain client asset goals win seven annual bonuses. These asset and bonus numbers are all the same through year five, but two additional 10 percent bonuses have been added on in years six and seven.

The full deal looks like this:
Year 1: 65% of onboard assets (total assets at previous firm) = bonus worth 60% of GDC
Year 2: 90% of onboard assets = bonus worth 50% of GDC
Year 3: 110% of onboard assets= bonus worth 40% of GDC
Year 4: 125% of onboard assets= bonus worth 30% of GDC
Year 5: 150% of onboard assets= bonus worth 20% of GDC
Year 6: 150% of onboard assets = bonus worth 10% of GDC
Year 7: 150% of onboard assets = bonus worth 10% of GDC

Recruits are not so happy with the deals. “I know this new deal is not being received very well,” said one recruiter who preferred to speak anonymously. “Because the old deal, which they’re still using to recruit with, had a large component of cash.” The old deal, with the 5 back-ends, is still being offered in some cases, however, while the new deal is being tweaked and polished, so that the firm can roll out a single, final version in January.

Small Recruits

For smaller producers, the game has also changed. Instead of landing in the penalty box, a guy doing $250,000 who works in a smaller city and has the potential to grow can now get an upfront check for 75 percent of trailing 12 months production from Merrill Lynch. Like for the bigger producers, these deals come with 7 back-end bonuses, says a recruiter. In the fourth year, for example, if that advisor has moved 120 percent of his assets over he can get a bonus worth 30 percent of his gross production, without any cap—even if he’s managed to jack that production up to $2 million.

“A year ago, I was telling people, you are going to get fired,” said one recruiter. “You’re going to be out of a job. Your payout is going to get cut to 21 percent. They can now leave that job and get recruited.”

Basically, the old system made it very difficult for branch managers to make exceptions where warranted, said recruiters. “This is so the manager in Boisie or wherever can be talking to an Ameriprise guy, and it’s the only guy in play in Boisie and he can cut him a deal,” said one Merrill recruiter. “Until now, there was no mechanism to allow for an easy bypass of the Merrill system because you had to plug the numbers in. It had become a little cumbersome. Maybe the advisor falls in the fifth quintile, but maybe he’s been at a second tier firm for his whole life and has this great untapped potential. Or maybe he is making fifth quintile numbers in a small town where that’s quite a good number.”

In the current recruiting market, these kinds of FAs have become more attractive. “There just aren’t that many sources of new hires right now,” says one veteran recruiter. In fact, over 7,300 brokers left the four biggest full-service brokerages—Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas—from January 2009 through June of 2010, according to Aite Group research. Many of these advisors went to regional firms, RIAs and independent broker/dealers. Meanwhile, the traditional talent pool—advisors from rival Wall Street firms—has diminished dramatically because so many of these Wall Street advisors signed long-term retention deals following the mega-mergers of 2008 and 2009.

“All four firms are on the trend of reaching way lower than they ever have before,” says one recruiter who preferred to speak anonymously. “Whether that’s lower producers or organizations that aren’t typically on their radar.” He and other recruiters mentioned Stifel Nicolaus, Edward Jones, Ameriprise and Janney Montgomery as new sources of recruits for wirehouse firms—even independent b/ds like LPL.

Bonus Wars

How can Merrill and the rest of the big Wall Street firms continue to throw so much money at recruiting and compensation? One recruiter who works with Merrill claims the deals are still profitable, at least for Merrill. A 200 percent deal for a $1 million producer will break even after year 5, the recruiter says, as long as the advisor is able to bring on 100 percent of his client assets. So 9-year deals at 340 and 350 percent of production is “pushing that as far as they can without booking a loss.” Presumably then, 14-year deals at 340-360 percent get the firm safely over the profitability hump. And as noted, if an advisor leaves, he is required to pay the upfront money back on a pro-rated basis.

But over the long-term the deals can't continue, say analysts. Granted, they have been saying that for some time.

“It’s not sustainable,” says Alois Pirker, an analyst with Aite Group. “Personnel is already such a huge expense. Those firms are buying business; they’re not earning business from clients." As soon as the firms are able to stabilize, to reverse client and asset outflows, he says, then the bonuses may come down. But until then, the firms will keep up the game, because advisors only want to join a growing firm. “If you are perceived as one who is losing clients then advisors will be more cautious,” says Pirker.

“If you ask time frame, it could be another year,” he forecasts. “The question is, when does Merrill or Morgan Stanley feel comfortable again that the brand is strong enough that folks want to work there, whether they throw money at them or not. Say the integration of MSSB goes stellar, they become the market leader, then everyone will want to go there, they will roll back the signing bonus. The same thing will happen at the other firms. I’m not yet sure they can attract advisors without those big checks.”

In the meantime, the firms may just continue to tighten their golden handcuffs, making it harder for brokers to collect on their bonuses by inserting additional growth hurdles and lengthening the amount of time it takes to collect all the money.

For more on recruiting, see these recent stories:
The Fight For Talent

Wells Fargo Advisors Jacks Up Recruiting Bonuses

UBS Hires Four HNW Advisors