Another wave of financial advisor defections could be just around the corner, says an Aite Group report. Switching for big signing bonuses spiked during the recent financial crisis when Wall Street’s biggest brokerages merged or were acquired. But it died down a bit after Merrill Lynch and Morgan Stanley offered their financial advisors retention packages.
The Boston-based independent research firm said it can’t confirm that this prediction will play out, but based on its interpretation of its latest data, many FAs are within a few years of nearing the end of the lucrative retention packages that convinced them to stay put with their employers—as a result, they will no longer feel “held back” by these contracts. Nine percent of FAs surveyed by Aite Group had one year left on their contracts; 13 percent had two years; 22 percent had three years and another 9 percent had four years.
“Firms have to be prepared to see these producers potentially change employers or go independent. Sign on bonuses from top wirehouse firms, which are rumored to have reached around 300 percent of a broker’s last 12 months of production, are certainly an important factor in this context,” according to the Aite report authored by Alois Pirker. (The report, based on 151 responses from employee advisors at wirehouses and broker dealers was conducted this March.)
“Often, these contracts were structured as forgivable loans, which means that the amount due in case of a departure decreases with every year the advisor remains at his employer,” said the Aite report, an advance copy of which was made available to Registered Rep. “Clearly, as soon as this amount is surpassed by the substantial sign-on bonuses that have become a common feature in the wealth management industry, retention packages will lose some of their lock-in effect for financial advisors, who will feel less bound by them.” All told, across the sample of wirehouse brokers polled, 43 percent received retention packages.
Aite notes that retention packages offered by the large wirehouses, especially by Bank of America and Morgan Stanley, to their best producers, have undoubtedly played a major part in retaining FAs and their clients’ assets. The packages were offered when a “war” for advisory talent broke out in 2008 and 2009 as the financial crisis unfolded. “While many of the dominant wealth management franchises, like Merrill Lynch, Smith Barney, and Wachovia Securities, were in the process of being acquired, others like LPL, Edward Jones and Raymond James, used this unique opportunity to hire unhappy advisors from acquired firms,” according to the Aite study, referring to the breakaway brokers.
In response, the new owners of the acquired firms moved quickly to stem potential departures, extending tantalizing retention packages. “While these contracts have proven effective thus far, the real moment of truth will arrive once they expire and top financial advisors decide whether their employer does in fact offer the best work environment for them,” Aite notes.
Aite found that that 72 percent of “locked-in” wirehouse advisors felt the value of their retention packages was enough to keep them at their employers. That, however, was no longer the case for the other 28 percent who said they’d have no qualms leaving. One third of potential wirehouse movers said they’d switch to a rival wirehouse while the second most popular option was going independent—cited by one in five wirehouse brokers.
According to Aite, the desire for a higher payout tops the list of reasons why FAs want to move today, as it did 15 months ago when Aite conducted a similar survey. Indeed, 22 percent of wirehouse brokers were thinking about a departure from their current employer for this reason. The second biggest motivation is “uncertainty” at their current employer. In fact, the number of wirehouse brokers that cited this uncertainty at as the dominant reason increased to 16 percent from 6 percent in 2009. “The ownership changes and associated integration efforts that wirehouse firms have been battling for some time has clearly left its mark on their producers; one in six cite it as their primary reason for considering a departure from their firm,” Aite writes in the report.
Aite warns that two-thirds of potential switchers have an exact target date for their exit. In 2011, non-wirehouse brokers will comprise the vast majority of switchers. Next year, however, will see an equal mix of wirehouse and non-wirehouse FAs looking to make a move. “With 38 percent of potential breakaways planning to move in 2012, next year will be a critical year for wirehouse firms. The reason for the time lag between wirehouse and non-wirehouse brokers is most likely the retention contracts, which are much more common in the wirehouse space,” Aite notes.
By next year, FA payback amounts due to retention contracts will have further diminished. Aite thinks that might encourage wirehouse advisors to hold off until then to bolt. “This also means that their employers have another year’s time to convince them to abandon their breakaway plans,” Aite says.
