Senior executives at leading independent broker-dealers are split in their assessment of recruiting over the first half of this year, with some expecting a strong start to 2017, while others are not as sanguine.
Confusion in the recruiting market caused by questions surrounding the implementation in April of the Department of Labor's new fiduciary rule for retirement accounts is the chief reason for the dual perspectives, executives said.
On one hand, advisers are thinking about and moving to larger, more established IBDs looking for stable firms that have invested significant amounts in systems and technology so advisers can make a smooth transition to a fiduciary rule.
On the other, some large groups of advisers may delay moving to a new firm until the second half of the year. Fees for branch managers at larger groups are now in focus due to the DOL's emphasis on reasonable compensation; branch managers are in the chain of a rep's fees because they typically take a small percentage of a rep's payout in return for services.
“The first and second quarters are potentially slower after a great year, but we could see a bounce back in the second half of this year and into 2018,” said Eric Schwartz, non-executive chairman of Cambridge Investment Research, Inc., who added that the firm in 2016 recruited advisers with $80 million in annual fees and commissions, an all-time best for the firm.
“Recruiting will be a little bit slow till there is greater clarity around the DOL,” he said. “This is affecting larger groups. Advisers who produce $250,000 to $1 million in revenue seem to coming over in good numbers. It's the big groups that are waiting for clarity.”
“The DOL is focusing on the same price or payout for all investment types so it doesn't appear that the broker-dealer is encouraging the adviser to sell one product over another,” Mr. Schwartz said. “If DOL doesn't come about, we don't have to make those changes. Right now, there's uncertainty about the payout for a potential recruit, but advisers also face the same uncertainty if they stay where they are.”
Others, however, had a far rosier recruiting forecast for the beginning of 2017.
Commonwealth Financial Network is “looking at a record first quarter in recruiting, a 15% increase from the final quarter of 2016, and we finished strong,” said Andrew Daniels, managing principal of business development at the firm.
The firm's
decision last year to eliminate paying advisers commissions for working with client retirement accounts did not put a dent in recruiting, he said. “We thought there would be more push back on that. But the folks we tend to attract are doing an overwhelming majority of their business based on fees.”
Commonwealth recruited advisers who generated more than $52 million in fees and commissions last year, Mr. Daniels said.
The former CEO of LPL Financial, Mark Casady, who retired at the start of the year, gave a positive outlook to recruiting during the November call with investors to discuss LPL's third quarter earnings.
Replaced by LPL's former president Dan Arnold, Mr. Casady will step down as chairman by the end of the first quarter.
Source: InvestmentNews research
Mr. Casady clearly sees the DOL fiduciary rule as a positive catalyst for recruiting at big firms like LPL. “The coming regulatory changes are an even stronger catalyst among banks, many of whom are exploring no longer operating a broker dealer,” he said on the earnings call. “We are seeing a significant increase in volume of inquiries.”
“We're seeing a significant increase in that activity, which leads to better recruiting results,” he said. “So we would certainly feel comfortable with net 400 (advisers annually) that we've used historically as a goal for the business.”
Meanwhile, the four wirehouses are currently seeing some revamping of recruiting deals, thanks to the DOL fiduciary rule, according to one industry recruiter.
The deals are lower than they once were but a greater percentage of the overall amount of money is guaranteed, said Mindy Diamond, adding that a greater amount of an adviser's deferred compensation that he may have left at his old firm is reimbursed.
In the fall, the DOL published a series of FAQs – frequently asked questions – and some focused on compensation packages paid to advisers who leave one firm to join another, she said.
The DOL made clear that back end bonuses to advisers in relation to production hurdles – a long standing and common measure in recruiting plans - were in violation of the rules, Ms. Diamond said. “The wires and regionals have rejiggered their deals multiple times since then to come up with packages that allow them to recruit and not be in violation.”
(More: Cambridge's Eric Schwartz looks into the future of the independent broker-dealer industry)
