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

Rosie the Robot, Amazon, and the Future of RAAI

Rosie the Robot, Amazon, and the Future of RAAI

Written by: Travis Briggs, CEO at ROBO Global US

It’s tough to find a kid out there who hasn’t dreamed about robots. Long before artificial intelligence existed in the real world, the idea of a non-human entity that could act and think like a human has been rooted in our imaginations. According to Greek legends, Cadmus turned dragon teeth into soldiers, Hephaestus fabricated tables that could “walk” on their own three legs, and Talos, perhaps the original “Tin Man,” defended Crete. Of course, in our own times, modern storytellers have added hundreds of new examples to the mix. Many of us grew up watching Rosie the Robot on The Jetsons. As we got older, the stories got more sophisticated. “Hal” in 2001: A Space Odyssey was soon followed by R2-D2 and C-3PO in the original Star Wars trilogy. RoboCop, Interstellar, and Ex Machina are just a few of the recent additions to the list.

Maybe it’s because these stories are such a part of our culture that few people realize just how far robotics has advanced today—and that artificial intelligence is anything but a futuristic fantasy. Ask anyone outside the industry how modern-day robots and artificial intelligence (AI) are used in the real world, and the answers are usually pretty generic. Surgical robots. Self-driving cars. Amazon’s Alexa. What remains a mystery to most is the immense and fast-growing role the combination of robotics automation and artificial intelligence, or RAAI (pronounced “ray”), plays in nearly every aspect of our everyday lives.

Today, shopping online is something most of us take for granted, and yet eCommerce is still in its relative infancy. Despite double-digit growth in the past four years, only 8% of total retail spending is currently done online. That number is growing every day. Business headlines in July announced that Amazon was on a hiring spree to add another 50K fulfillment employees to its already massive workforce. While that certainly reflects the shift from brick-and-mortar to web-based retail, it doesn’t even begin to tell the story of what this growth means for the technology and application firms that deliver the RAAI tools required to support the momentum of eCommerce. In 2017, only 5% of the warehouses that fuel eCommerce are even partially automated. This means that to keep up with demand, the application of RAAI will have to accelerate—and fast. In fact, RAAI is a key driver of success for top e-retailers like Amazon, Apple, and Wal-Mart as they strive to meet the explosion in online sales.

From an investor’s perspective, this fast-growing demand for robotics, automation and artificial intelligence is a promising opportunity—especially in logistics automation that includes the tools and technologies that drive efficiencies across complex retail supply chains. Considering the fact that four of the top ten supply chain automation players were acquired in the past three years, it’s clear that the industry is transforming rapidly. Amazon’s introduction of Prime delivery (which itself requires incredibly sophisticated logistics operations) was only made possible by its 2012 acquisition of Kiva Systems, the pioneer of autonomous mobile robots for warehouses and supply chains. Amazon recently upped the ante yet again with its recent acquisition of Whole Foods Market, which not only adds 450 warehouses to its immense logistics network, but is also expected to be a game-changer for the online grocery retail industry.

Clearly Amazon isn’t the only major driver of innovation in logistics automation. It’s just the largest, at least for the moment. It’s no wonder that many RAAI companies have outperformed the S&P500 in the past three years. And while some investors have worried that the RAAI movement is at risk of creating its own tech bubble, the growth of eCommerce is showing no signs of reaching a peak. In fact, if the online retail industry comes even close to achieving the growth predicted—of doubling to an amazing $4 trillion by 2020—it’s likely that logistics automation is still in the early stages of adoption. For best-of-breed players in every area of logistics automation, from equipment, software, and services to supply chain automation technology providers, the potential for growth is tremendous.

How can investors take advantage of the growth in robotics, automation, and artificial intelligence?

One simple way to track the performance of these markets is through the ROBO Global Robotics & Automation Index. The logistics subsector currently accounts for around 9% of the index and is the best performing subsector since its inception. The index includes leading players in every area of RAAI, including material handling systems, automated storage and retrieval systems, enterprise asset intelligence, and supply chain management software across a wide range of geographies and market capitalizations. Our index is research based and we apply quality filters to identify the best high growth companies that enable this infrastructure and technology that is driving the revolution in the retail and distribution world.

When I was a kid, I may have dreamed of having a Rosie the Robot of my own to help do my chores, but I certainly had no idea how her 21st century successors would revolutionize how we shop, where we shop, and even how we receive what we buy - often via delivery to our doorstep on the very same day. Of course, the use of RAAI is by no means limited to eCommerce. It’s driving transformative change in nearly every industry. But when it comes to enabling the logistics automation required to support a level of growth rarely seen in any industry, RAAI has a lot of legs to stand on—even if those “legs” are anything but human.

To learn more, download A Look Into Logistics Automation, our July 2017 whitepaper on the evolution and opportunity of logistics automation.

The ROBO Global® Robotics and Automation Index and the ROBO Global® Robotics and Automation UCITS Index (the “Indices”) are the property of ROBO who have contracted with Solactive AG to calculate and maintain the Indices. Past performance of an index is not a guarantee of future results. It is not intended that anything stated above should be construed as an offer or invitation to buy or sell any investment in any Investment Fund or other investment vehicle referred to in this website, or for potential investors to engage in any investment activity.
ROBO Global
Robotics and AI
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ROBO Global LLC is the creator of the ROBO Global® Robotics and Automation Index series, which provides comprehensive, transparent and diversified benchmarks representing the ... Click for full bio