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

I Have A Brand And It Haunts Me

I Have A Brand And It Haunts Me

I was talking to my pal “Jonas” who recently decided to freelance (vs building a multi-consultant business) when he left a bigger firm to do his own thing.

Jonas is a global talent guy who works across the planet for some of the world’s most well known companies. He decided his best play—the one that would allow him to focus on what he loves most and live the life he’s planned—is to freelance for other firms.

His plan got off to a bit of a rocky start because—get this—none of the firms he approached believed he’d actually want to “just” freelance. He’d earned his rep by steadily building deep, brand name client relationships, practices and business, not by going off by himself as a solo.

Or as he put it “I have a brand and it haunts me.”

We both had a good belly laugh because he was already rolling in new projects, thrilled with his choice to freelance.

And yet, isn’t that the truth?

Good, bad, indifferent—our brands DO haunt us.

They whisper messages to those in our circle “trust him, he’s the bomb”, “hire her for anything creative as long as your deadline isn’t critical”, “steer clear—he talks a good game but doesn’t deliver”.

And thanks to social media, those messages—good and bad—can accelerate faster than you can imagine. One client, one reader, one buyer can be the pivot point that takes your consulting business to new territory.

So how do you deal with it?

You double-down.

Yep—you go for more of what comes naturally. In Jonas’ case, he stuck with what he’s known for—his work, his relationships, his track record for integrity—and won over any lingering skepticism about his move.

We weather the bumps in the road by staying true to who we are at our core.

So when a potential client says “Sorry, you’re just too expensive for me”, you don’t run out and change your prices. Instead, you listen carefully and realize they aren’t the right fit for your particular brand of expertise and service.

When a social media troll chooses you to lash out at, you ignore them and stay with your true audience—your sweet-spot clients and buyers.

And when your most challenging client tells you it’s time to change your business model to serve them better, you listen closely (there may be some learning here) and—if it doesn’t suit your strengths—you kiss them good-bye.

If your brand isn’t haunting you, is it really much of a brand?

Rochelle Moulton
Brand Strategy
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I am here to make you unforgettable. Which is NOT about fitting in. It IS about spreading ideas that make your clients think, moving hearts and doing work that matters. I’m ... Click for full bio