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Is Deferred Compensation Holding You Captive?

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3 options for advisors who are feeling the ever-tightening squeeze of their firms’ “golden handcuffs”

There’s a battle for control taking place between big brokerage firms and the advisors who work for them—a battle that advisors are losing more of as each year goes by. Deferred compensation often serves as the firms’ ammunition – a way to control behavior and keep advisors in their seats – in an attempt to stave off attrition. The firms count on an advisor’s reluctance to make a move and leave money on the table. And with retention deals falling off and free agency status growing closer, it’s no surprise that wirehouse advisors have found more of their income being deferred—whether it be a percentage of their payout or for bonuses earned.

If money is the only benchmark for an advisor evaluating whether to stay or go, then deferred compensation can be a pretty powerful deterrent—especially if you’ve spent your entire career at the same firm. But for those advisors for whom the pain of staying has become greater than the pain of leaving, the “golden handcuffs” may not be enough to keep them in their seats.

Options for advisors who’ve reached the proverbial tipping point

As with any potential move, the calculus for considering a change begins by weighing the pros and cons of staying versus going. If you’re a long-tenured advisor who’s accumulated a significant cache of deferred comp, there’s no denying that leaving behind a large chunk can be a hard pill to swallow. Yet if you no longer feel that where you are is serving you or your clients’ best interests, allowing your business to suffer while waiting for your unvested deferred to vest can come with a far greater cost.

The good news is that the waterfall of opportunity has changed exponentially in the past several years, and you may be surprised to find that you have several viable options to consider if you no longer feel that staying with your firm is the right choice. Consider these 3 alternatives:

1. Another firm: Upfront economics may offset what you are leaving behind.

While recruiting deals may not be at the high watermark that they were a few years back, today’s transition packages – whether it be at a wirehouse, regional or boutique firm – are still pretty rich. In fact, they’re often rich enough to offer an advisor the opportunity to de-risk a move and monetize the business while also offsetting unvested deferred. “Published deals” for top advisors – or what the industry refers to as “franchise players” – can range anywhere from 200 to 300% all in, with some firms offering at least partial reimbursement for unvested deferred comp.

2. Independence: The long-term value and equity in your business is typically greater than what you’re giving up in the short-term.

There’s been no shortage of long-tenured advisors – many with significant deferred at stake – making the leap to independence in search of greater freedom and flexibility. While a move to independence may not solve for the short-term economics, these advisors are betting on the long-term value and equity of their business—not to mention landing at a model which they believe offers them the ability to serve clients better and grow their business faster.

Related: When the Options of Independence Throws You a Curveball

Related: When Adding One Client at a Time No Longer Seems Like Enough

With multiples ranging from 5–7X for RIA businesses with $500mm+ in AUM, the opportunity to sell a business on the open market down the road far exceeds a short-term monetization event—not to mention the deferred an advisor leaves behind. And, by gaining access to truly open architecture and enhancing their ability to service clients, many indy advisors make the case that it’s their clients who stand to benefit the most.

3. Quasi-Independence: A solid solution that offers short-term monetization, the flexibility of independence, plus support.

Lastly, there’s a middle-ground solution that’s gained incredible traction with top advisors: The quasi-independent space. While not a new model, it’s become a more attractive solution for advisors seeking greater freedom and flexibility but are not interested in full-on independence. The upfront recruiting deals – often a mix of cash and equity in a larger enterprise – are a real draw, particularly for advisors who feel that they have too much unvested deferred at stake. It’s a model that’s a real win for advisors—allowing them to monetize, grow their business and, in many cases, better serve their clients.

Truth be told, it may be hard to come to terms with leaving behind any portion of compensation that you have rightly earned. But the good news is that despite how tight those golden handcuffs may become, no one is ever stuck. By changing your thoughts and being flexible, you’re likely to find that the evolved landscape has many options to solve for what’s frustrating advisors most. And while big brokerages may seek to further bind advisors to the firms, the opposite response appears to prevail as advisors increasingly vote with their feet.

So, if you’re at a firm that no longer feels right, now is the time to get acquainted with what is a vastly changed landscape. An educated and open mind will help you find the right next step and get you that much closer to your idea of perfection.

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