Over the last 18 months there has been a significant shift in the “process” of recruiting in three different tiers of the world of wealth management. The wirehouses, regionals and hybrid RIA’s (think HighTower, Focus, Dynasty) have turned into mini private equity operations in their evaluation of deals, individual advisors and teams. The level of scrutiny that is now being applied to nearly every deal is unprecedented and speaks to the pressure that executives at all of these firms are under to perform.

Why the shift? It really is simple – better than 90 percent of net new money (assets) is being procured through recruiting. Yes, the markets have helped with asset growth organically, but the end all be all at these firms is net NEW money. Nearly all of those funds come from recruiting large advisors and teams away from competitors. When the stakes are so high in regards to the success of one practice or another throughout and after the transfer; the due diligence tends to intensify. Let’s take a look at three specific areas where the process has changed and the affect it has had on both the firms and the advisors.

  1. Business mix evaluation. I simply cannot stress enough how this particular category has changed over the last 12 months. The “deep dive” that is occurring on client mix, product mix, compensable revenue etc has gone to a whole new level. This is really the portion of the process that has turned into a “private equity” like deal. An advisors book of business is scrubbed from head to toe looking for not only current revenue producing assets, but also possible future revenue producing assets. What level of asset based lending could be applied to each account? What is the mortgage lending opportunity? What are the insurance possibilities? Accounts are also evaluated based on there level of commitment to the advisor vs. the firm they are coming from. All of this is rolled up into an equation that becomes part of the deal negotiation.
  2. Staffing. This one has become a little bit sticky if you ask me. Administrative staff – to some degree – are being treated as an expense involved in the larger equation as opposed to integral parts of the client facing team. As the private equity template is over laid on the team as a whole staff is being seen as either a plus or minus from an expense stand point. At times firms are asking larger teams to leave some staff behind in certain transitions. The chill of “return on investment” math creates some unnecessary conversations here. This is an area where I have personally become a bit uncomfortable with the process.
  3. ROI. The entire process has come down to this age-old business acronym. With firms investing millions of dollars on recruits, they have come to terms with applying relatively hard and fast models to the potential success of each team/advisor. For example, one wirehouse has moved its ROI standard from 12% to 14% over the last 18 months. They’ve also increased their scrutiny of client assets, CRD disclosures, staffing and future compensable revenue. The process has become both paperwork and time intensive. The firms simply shrug and claim “look…we are investing millions of dollars and buying a business. The due diligence and dynamic reviews are necessary to justify the multiples that we are paying to shareholders”. Sound familiar?

As the high end recruiting game becomes more and more sophisticated, it begs the question for most firms: Wouldn’t it make sense to spend the same time and half the money to retain the larger advisors/teams already part of your brand? The answer time and time again comes back to three letters – NNM. Net New Money.

 

Andrew Parish is the CEO and founder of AdvisorHUB and managing director of Axiom Consulting. Follow him @APadvisorhub