Wall Street recruiting packages have continued to soar in the past year. But insiders say 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 380 percent of a rep's trailing 12 months' production, says Rick Peterson, president of Rick Peterson & Associates, a Houston-based industry recruiting firm. 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, 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. 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. He doesn't see it improving until the first quarter of 2011. “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.”
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. On the other hand, no single wirehouse can opt out of the game as long as the others are paying out huge packages. “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,” he says.
Roame says branch managers are also on the losing end of the bargain. “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.”
Says another wirehouse BOM in the Northwest, who also asked not to be identified: “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.”