Faced with intense competition for financial advisers and growing transition costs, an increasing number of independent-contractor broker-dealers over the past year have boosted the amount of money they give to representatives and advisers to switch firms.
NEW YORK — Faced with intense competition for financial advisers and growing transition costs, an increasing number of independent-contractor broker-dealers over the past year have boosted the amount of money they give to representatives and advisers to switch firms.
The broker-dealers that recently have increased the transition or bonus money include top firms such as LPL Financial Services of Boston and San Diego, Commonwealth Financial Network of Waltham, Mass., and Cambridge Investment Research Inc. of Fairfield, Iowa, according to executives and recruiters.
In the past, those firms and others gave recruits transition packages of 2% to 3% of their prior 12 months’ production. Those packages, which have various structures, are now as high as 8% to 10%, executives said.
Meanwhile, more independent registered reps are making an upfront bonus their chief priority when thinking about changing firms, industry observers said. Long an accepted part of compensation packages for wirehouse brokers, upfront payments to independent reps are sometimes clouding the latter’s ability to make sound decisions, recruiters and consultants said.
For example, National Planning Corp. of Santa Monica, Calif., is offering reps a package of 42.5% of their prior 12 months’ fees and commissions, in the form of a forgivable loan and transition money.
“It should be the gravy, but some advisers are allowing it to be the meat,” said Rebecca Pomering, a principal with Moss Adams LLP of Seattle, which counts many independent-contractor firms as clients. “Who it’s worse for is the adviser who is being lured from one firm to another.”
Others agree. “Instead of looking at crucial things to make a move, reps are looking at how much money they can make,” said Jodie Papike, vice president of Cross-Search, a Jamul, Calif., recruiting firm for independent reps and executives. Reps need to consider technology, the efficiency of the back office, and the firm’s size and culture before thinking about an upfront bonus, she said.
“If you land at a broker-dealer that’s not the right culture for you, you’re not going to be happy, and that’s going to affect your practice,” Ms. Papike added. Although the competition for reps and advisers is intense and getting more expensive, a remarkably small number of
independent-contractor reps leave their firm to join another independent firm, one industry observer said.
Of about 60,000 independent-contractor reps, just 600 — or 1% — leave an independent broker-dealer to join another over the course of a year, said Charles “Chip” Roame, managing principal of Tiburon (Calif.) Strategic Advisors LLC.
Another 6,000 reps — or 10% — are either cut by firms or leave the industry, he said. Those include low-producing brokers.
“For some firms, it’s going to be an economic strain to keep up the cost [of recruiting] if they don’t get the return,” said Dennis Gallant, president of Gallant Distribution Consulting of Sherborn, Mass.
The increase in upfront money hasn’t been dramatic, said John Rooney, managing principal in San Diego with Commonwealth Financial Network. He declined to discuss specific recruiting packages but said that the dramatic increase in account transfer fees played a considerable role in Commonwealth’s decision.
Some firms recently have increased the charges by two or three times to move a client’s account, Mr. Rooney said. Those now are topping out at $100 to $150 for some accounts, he said. “It’s a reimbursement to move a book of business,” Mr. Rooney said.
“The reps we want aren’t looking for upfront money,” said Eric Schwartz, chief executive of Cambridge Investment Research.
The market, however, has spurred the change at the firm. The offer is made “always in response to someone else,” Mr. Schwartz said.
“The cost for advisers to go independent is clearly increasing,” said Bill Morrissey, executive vice president of branch development for LPL. “We recognize the increased cost of going independent,” he said, adding that determining the transition packages is “situational.”
In the end, some independent reps and advisers are offended by large offers — often in the form of loans — because they come with strings attached, one recruiter said.
“It’s a double-edged sword,” said Jonathan Henschen, an industry recruiter in Marine on St. Croix, Minn. Although large recruiting packages can be “enticing,” some reps put much more value on clients and the culture of the broker-dealer, he said.
