Never Confuse Deal Economics With Deal Shape

By ASHLEY FOLKES
For AdvisorNews 

Ralph Waldo Emerson said, “Money often costs too much.”

For advisors who have entered the market looking to make the move to another firm, there could be any number of factors prompting the search for greener pastures. Do any of the following resonate?

• You’ve outgrown your firm.
• Your current firm continues to mandate cross referrals, more product sales, or partnering with other lines of business.
• They cut your payout grids or created minimum account levels.
• They change (seemingly) just for change’s sake, and it is tough to understand the value to the client and or the advisor.
• Your current firm does not offer a full suite of products or services for you to truly take care of your clients.
• You’re looking for entrepreneurial freedom to manage your practice with the expertise you’ve spent years developing.

The decision to transition your business is not to be taken lightly, and in the same way you holistically evaluate wealth management strategies for your clients, so, too, should you consider a transition of your business. You will likely entertain several opportunities and very quickly feel like an all-star athlete that just hit the free agency market. Pause: this is where you should be careful of the blinding effect of money, deal structures, and packages that will be put in front of you.

I’ll start by stating the obvious: firms are trying to grow, and growing includes more accounts, households, assets, revenue and income, more product sales, and squeezing more juice out of the same orange by grabbing deeper wallet share of existing clients. This creates a competitive market place for good advisors in motion, and the market knows they don’t come cheap.

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My recommendation to advisors is to pause, take a breath, and look beyond the up-front check that firms are offering because these bonuses come with a cost. Unfortunately, some firms will tell recruits whatever they want to hear to bring them over because they know once the recruit joins the new firm, they will be locked in to a forgivable promissory note and will be unlikely to put their clients through another move in the near future. Some call the deals negligent, some intentional misrepresentations, but unfortunately, they can be common in the recruitment process.

Up-front recruiting checks are almost always delivered as forgivable loans (a debt to be paid off through growth and fee production for the firm), and there are additional costs associated with these loans that may not be immediately obvious to the advisor. Think of this as you would a balance sheet. Is it preferable to grow your cash flow through revenues or through liabilities? You would likely not council your clients to raise cash through borrowing – unless absolutely warranted, so why would this be a sound approach for you? Consider…

Advisors will often look at the up-front bonus as a source of freedom, but I see it as an additional obligation. Up-front compensation is usually applied to a 5–10 year contract. Often, we all have the best of intentions to save and invest that compensation, but as we all know, reality and competing priorities (both personal and professional) usually drive some portion to be used early in an advisor’s transition. Some examples:

In the honeymoon period of being recruited and joining a new firm, the multitude of long-term circumstances which could change (either in your life or in the firm’s policies) are often overlooked. These can include:

All these factors could potentially place a significant advantage or disadvantage on the advisor and their clients because of their inability to move and react. Remember, a lot can change in a firm, the industry, or personally in 7–10 years (think about technology and your business 10 years ago—in 2008—and how different it is today).

Ultimately, an advisor’s clients should be his or her top priority. We all seek to establish sound strategies for our clients. That said, market conditions are not predictable or within our control. Often, the types of compensation agreements discussed are tied to converting and maintaining a certain level of client AUM. Under periods of market contraction, clients’ performance and an advisor’s own are under pressure. The type of agreement discussed here will compound the pressure at a time when the advisor is least able to influence it. Additionally, if these firms make changes to payout and compensation agreements, install incentives for cross and upselling, and raise deferred compensation amounts, they are further controlling the advisor’s ability to meet the conditions of the up-front compensation.

My Position:

If you are an advisor considering a move, I challenge you to think beyond basic factors and really reflect on those attributes in a firm that will provide you and your clients with long-term happiness and success. I would perform due diligence and make sure the deal you are taking is understandable, obtainable, and that there aren’t any items they are trying to camouflage. The best way to do this may be to seek the advice of legal counsel with experience in the securities industry to help ensure you are doing everything you can to protect you and your clients’ best interests and understand what you are signing up for. Do a lot of soul searching to find out what you really want in a new firm so that you can really articulate your “why” to your clients.

Ask yourself some questions:

• Does the new firm and the firm’s management walk and live their values?
• Do they have a history and culture that allows you to put your clients at the center of your universe?
• Does the firm truly allow you to run your business your way? Will the firm value you as an advisor?
• Do they have the infrastructure, products, and services that fit your practice?
• Can you see yourself there for the long term?

By taking time to evaluate the landscape, to think about cash flow and balance sheet implications and to never confuse deal shape with deal economics will provide you with a peace of mind that in many ways is priceless.

Ashley Folkes, is  a Senior Vice President—Investments and Phoenix Complex Manager—at Moors & Cabot. Folkes has 20 years of experience in wealth management as a top producer, and has held several leadership roles in his career, including various producing sales management roles with Merrill Lynch, and AIG.  Prior to his new position, Folkes was a founding partner and Director of Private Client Solutions for Signature Wealth Concepts, a division of AXA- Advisors.