Understanding the Economic Value of Transition Deals

Understanding the Economic Value of Transition Deals

Now that the numbers are on the table, which offer adds up to be the right one for your business?

Last week we wrote about the economic rationale behind going independent vs. moving to another major firm as an employee. As a follow-up topic, we thought it prudent to analyze transition packages attached to big firm moves and peel back the layers of the onion to show the components of these deals.

Our goal is to help answer a burning question for many advisors: What is the best deal on the Street?” 

(Note: While money is always a determinant, the real answer depends upon what factors are most important to you and what you value the most.)

When it comes to transition deals, structure is key

While it’s true that deals are somewhat formulaic (per firm), the levers each firm pulls to arrive at their total package are anything but. A structure’s implication on advisors is also based on individual circumstances such as growth trajectory, confidence in portability, runway to retirement, amount of unvested deferred compensation, and amount of ERISA business (this is a new one related to the DoL Fiduciary Rule).

Let’s take a look at the most common elements of recruitment packages in the traditional employee world:

  1. Upfront consideration (typically 125–175% of Trailing 12 months production) – Advisors at any station of their careers value this component the most, and for good reason: It’s guaranteed money—virtually risk free, can be deployed in the stock market instantly, and is only taxed at a rate of 1/9 per year (or however long the note attached to the forgivable loan lasts).
  2. Back-end Bonuses (typically 0–50%) – While in some cases this is a thing of the past because of the DoL Rule, performance-based back-ends (paid on non-ERISA assets and production only) still exist most notably at Morgan Stanley, Merrill Lynch and RBC. Other firms, like Ameriprise, offer guaranteed back-end awards based upon tenure. Since advisors can only realize these payments if they execute a successful transition and grow significantly, many place little (if any) value on back-end bonuses. Advisors with significant ERISA business may also be hurt by this structure. For those who are expecting explosive growth and are confident in transition success, though, choosing a deal with rich back-ends may represent the strongest option. However, larger producers typically bump up against the “law of large numbers” and may find it difficult to grow by the expected rates. The value an advisor places upon back-end bonuses most often has to do with risk-tolerance and confidence in the business overall.
  3. Unvested Deferred Compensation Replacement (typically 0–25%) – Today only the wirehouses will replace an advisor’s unvested deferred compensation on top of their normal packages, while regional and smaller firms bake it into the overall economics. For this reason, advisors with significant deferred comp may find a wirehouse package to be more attractive.
  4. Guaranteed Payments such as longevity bonuses, salary, long-term deferred comp, enhanced grids, etc. (25–75%) – In the past, Raymond James sat alone in this category. Since October of last year, though, firms have gotten creative and restructured deals to make up for the elimination of back-ends. Advisors view this category with mixed emotions. On the one hand, certainty is a nice thing; however, some of these payments don’t come due until the tail end of a deal, raising time-value of money concerns. Overall, taking risk off the table is good for all!
  5. Grid Payout-factors to consider here include total payout, cash payout, and deferred payout – As a rule of thumb, regional firms offer stronger grids and less deferred, but total production, length of service, and team structure may skew the numbers considerably between each firm.
  6. Retiring Advisor Programs (100–300%) – An aging advisor population has pushed all the major firms to revamp their “sunset programs” which allow retiring advisors to monetize their life’s work. But, the devil is truly in the details here as requirements, terms and financing vary per firm. For those advisors looking to move once and monetize twice, considering a wirehouse with the strongest package may tilt the scales over the regional firms. Younger advisors or those working with family members, though, will likely place little weight on this component.
  7. Growth – While it is impossible to guess how much an advisor would grow if he stayed put vs. making a move, it is often the most important determinant in the decision-making process. As nice as a big signing bonus is, in the end, the opportunity to accelerate growth could be a more meaningful and permanent driver.

With today’s uncertain regulatory environment, thousands of advisors entering “free agency” as recruitment deals become fully forgiven, and a higher level of bureaucracy at the major firms, it comes as no surprise that top financial advisors are poking their heads out to explore the waterfall of possibilities. And while we never advocate for changing firms purely based on personal financial gain, is the economics are always a big part of an advisor’s decision.

So once you have done your due diligence, you need to ensure that you understand what’s most important to you before you can weigh the monetary benefits of a move. Because ultimately, only an advisor can quantify how much a recruitment package is really worth and which components of it are most meaningful. Then looking in totality, is the hassle of making a move justifiable?

Put another way, if a firm demonstrates to you that they have “a better mousetrap” – that is, that they will allow you to better serve clients and grow your business in a way that is most meaningful to you – that may actually represent the best deal on the Street.

Louis Diamond
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Growing up with both parents who are business leaders in the financial world, Diamond Consultants became a natural environment for Louis: one you can say he was in training fo ... Click for full bio

Most Read IRIS Articles of the Week: April 17-21

Most Read IRIS Articles of the Week: April 17-21

Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, April 17-21, 2017 

Click the headline to read the full article.  Enjoy!

1. Market Keeping You up at Night? Look for the Right Hedge

Like so many others in the industry, I was wrong. For years, I was certain that the bull market was nearing its end. I thought the market was over-extended, and that, surely, the wild equities run was coming to an end. But everyone else was bullish, and perhaps rightfully so. And while I’ve watched equities continue on their spectacular rise, I do think now is the time (really!) to put a hedge in place. Here’s why. Here’s how. — Adam Patti

2. How to Manage Bond Market Pain and Seek the Gain When Rates Are Rising

The realities for fixed income investors have changed. How is this being reflected in markets? Bond investing has become increasingly difficult over the past decade. Markets have been heavily distorted by ultra-low interest rates and quantitative easing, as well as by extreme risk aversion in response to the global economic crisis and the eurozone debt crisis. — Nick Gartside

3. Seven Reasons You'll Fail as a Financial Advisor

Is being a financial advisor worth it? I am an optimistic person and I encourage other people to keep a positive mental attitude (shout-out to Napoleon Hill and W. Clement Stone). However, by taking a good, hard look at the negatives in life, we can successfully pivot towards the positive aspects that will help us achieve our goals. — James Pollard

4. The Secret to Turning Every Prospect into a Client

How do you treat one of your most valued, existing clients? Here’s a list of some things that come to mind. — Andrew Sobel

5. Why Do Clients Change Advisors?

According to many advisors I speak with, the only clients that leave are those who have died. And while attrition may not be a big problem in this industry, I have to assume that at least a few clients change advisors without doing so via the funeral home. — Julie Littlechild

6. Why You Should Focus on Getting Referral Sources

I was talking with an advisor last week about how to get into conversations about what he does. He was relaying the story of going jogging with a friend who could be a good client but is, more importantly, connected to a large network of people who fit this advisors ideal client description. — Stephen Wershing

7. How Big Picture Thinkers Seize More Opportunities in 7 Steps

Big picture thinkers are not unicorns - rare and mystical. And they were not born with the innate ability to think big. They do, however, pay attention to the broader landscape and take the time to think, analyze and evaluate. — Jill Houtman and Danny Domenighini

8. 5 Actions to Build Your Reputation

Your reputation is who you are and how you show up, Monday to Monday®.  Many of us take our image and reputation for granted.  Give careful thought to the kind of reputation that you would be proud of Monday to Monday® and that would resonate with your purpose and priorities. — Stacey Hanke

9. How Are You Poised to Begin Welcoming GenZ to Your Workplace?

The generational changing of the guard is a fact of life as old as time. Young replaces old in responsibility, importance, control and culture. Outside of the family, the workplace is perhaps where this is seen most regularly by most people. — Shirley Engelmeier

10. Are Price Objections REALLY Price Objections?

Next time you hear your prospects give you price objections, it’s not because of the price. The give price objections because they don’t know the full value proposition that they’d be paying for. And it’s not based on their need, or your features and functions. It’s based on the buying criteria they want to meet internally. — Sofia Carter

11. Understanding the Economic Value of Transition Deals

Last week we wrote about the economic rationale behind going independent vs. moving to another major firm as an employee. As a follow-up topic, we thought it prudent to analyze transition packages attached to big firm moves and peel back the layers of the onion to show the components of these deals. — Louis Diamond

Douglas Heikkinen
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IRIS Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues to ... Click for full bio