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Beware! The Post-DOL World is Likely to Impact Recruiting Deals

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Beware! The Post-DOL World is Likely to Impact Recruiting Deals

Advisors and recruiters alike tread cautiously through a new land filled with uncertainty when it comes to transition packages.
 

Advisors have long held on to the certainty that when, and if, they were ready to change jerseys, they could do so and be paid the record-level deals that exist today. Everyone thought that we recruiters were crying wolf when we said, year after year, that at some point the gravy train would end and if you had a move in you, we strongly suggested making it sooner rather than later. While some advisors heeded our warnings, most believed that the rivers of wealth would never dry and that deals would just keep rising.

I can’t blame any advisor who chose to roll the dice and stay put—after all, in most cases the decision to do so was based on legitimate factors like waiting for a chunk of deferred comp to vest, a partner to retire, a large client’s estate to settle, or just plain old being certain that the current firm was the very best place to serve clients and grow.

But, here we are at the threshold of a whole new world – a post-DOL world – and we are just beginning to witness the impact it will bring. Merrill has already announced the elimination of commission-based retail retirement accounts, while the other big firms have signaled intent to use the Best Interest Client Exemption (BICE), but have not publicly given specifics yet. And, while we have no particulars yet, the next thing to be addressed is transition money. It is pretty clear that the DOL will force the big firms to eliminate any incentives to grow revenue—what is referred to as the “revenue back end component” of deals. Their reasoning is that the incentive has the potential to create a conflict of interest which goes against the very grain of the fiduciary mindset.

So, what do we know? There is some writing on the wall that we need to consider:

  • While the DOL Fiduciary Rule doesn’t go into effect until April of 2017, we have every reason to believe that the firms will implement any changes long before then.
  • We don’t know that a change will necessarily mean lower deals; we just know that while the firms are deep in the weeds trying to interpret the 1,000 page DOL ruling, everything is on the table and up for grabs.
  • There is no reason to believe that deals will go away altogether or that there won’t be robust incentives offered to quality advisors—we just need to wait and see if they will continue to be as “user friendly” as they are today and how firms will creatively manage in this new world.
  • We know that deals are at high water marks currently and it is very unlikely that they will get any better than they are now. We also know that firms are loath to put any more money at risk in a deal – i.e., the upfront component – so if the back end revenue bonuses are eliminated, they will need to figure out a different and perhaps more creative way to incent portability and growth.
  • The potential impact won’t only be on deal structure but also on the valuation of one’s business —for example, there’s currently some chatter about deals only being offered on fee based business.
  • The big firms know that if they mess with structure too much and make deals significantly less compelling, more and more advisors will go independent—or some version of it. To be sure, as the landscape has expanded, there are evermore real options outside the big firm world that allow advisors to monetize their businesses, build equity, and gain freedom, flexibility and control.

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Are the good ol’ days over?

There is still a window open between now and year-end (or at least through mid-December when FINRA closes) for advisors to monetize their businesses, taking advantage of current deal structure. While performing all the necessary due diligence and making a move in under 2 months can be a challenge, it’s not impossible for those who have already begun the exploration process. (Note: We caution that no move should be made without thoughtful and thorough due diligence.)

That said, especially with respect to top of the food chain advisors, we believe verily that deals need to remain competitive in order to ensure that recruiting flourishes. At the end of the day, deals may not look exactly as they do today, but we will wait and see how things shake out. As they say, when one door closes, another one opens—however it’s what’s behind that door that still remains to be seen.

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