If my recent experience in placing a wirehouse broker at a new firm is any indication, the ripples from the securities industry scandals are starting to be felt in places that the regulators haven't even begun to examine yet.
The broker I'm referring to had gotten to the offer stage with the firm, and when we received the offer letter, I was dumbfounded by what I read: The forgivable loan, that standard job-transition tool of the brokerage industry, was nowhere to be found. In its place was a signing bonus that the broker would be obliged to pay back in its entirety.
Puzzled by this departure from standard industry practice, I asked the firm, “What gives?” I was told that the firm's attorneys and accountants now consider forgivable loans a gray-area activity that might well touch off an audit of the firm. In the current regulatory climate, the firm is obviously eager to avoid such scrutiny at all costs.
What's strange about this case is that forgivable loans are not illegal. However, depending on whom you're speaking to, they may be considered inappropriate. Two high-ranking partners of one of the major national brokerage firms told me they think forgivable loans are examples of “aggressive accounting” that might not hold up under close scrutiny. Given that accounting practices are in the center of regulators' sights, the executives said that brokerage houses should be careful about how they handle up-front money.
In my experience, up-front money is handled thusly: Signing bonuses are delivered in a lump sum, but both parties promptly break that sum down according to the number of years covered by the employment contract. For example: a $200,000 signing bonus attached to a five-year contract would be considered as $40,000 per year for five years. This has extremely positive tax consequences for the broker, and potentially also for the firm hiring the broker.
The “new way” to handle up-front money is different. Each year the broker would owe the firm $40,000, plus interest based on prevailing rates. However, prior to the broker actually paying the firm, he would receive a bonus that would be based on extremely attainable production and assets-under-management goals — for example, achieving 50 percent of trailing 12-month production while transferring of 50 percent of assets from the old firm. These requirements would increase gradually each year — so gradually in fact that the broker would not have to meet the levels from the previous firm until the end of the third year.
Implications of the Situation
Given this shift in compensation practices, what do advisors need to do to adapt? First and foremost, any brokers who have changed firms in the last several years should call their accountants immediately to discuss how the changes could affect their personal financial situation.
True, the scenario my client and I encountered might prove an anomaly, a knee-jerk reaction to the scandals by one firm. But given the anxiety I see every day in the job market, and firms' obvious desire to avoid further controversy, I'm more inclined to believe that up-front money practices are poised for some major adjustments.
Nick Ferber is a managing partner of Sanford Barrows Group, an executive recruitment firm.