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Beware the 300% Signing Bonus
By Howard J. Stock
December 14, 2010
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While Jeff Spears is biased—he’s CEO of Sanctuary Wealth Services, a back-office firm for independent advisors—he says research for a new white paper has shown that while signing bonuses for top wirehouse producers have gotten more lavish, they could prove to be a Venus flytrap for ambitious reps.
Spears notes that while 300% recruiting bonuses are now the norm for the top 5% of producers all the big firms are vying for—“When you look at a firm’s profitability, it’s driven by a small sample of these elite advisors,” he says—they should weigh very carefully the costs as well as the benefits before taking the money.
The problem for hiring firms is that signing contracts weren’t sticky enough. In the 1990s and 2000s, 100% of trailing 12-month production paid out over five years was the norm, and the only way advisors would get more is if they could promise to bring a certain level of assets to the firm.
Overall, it wasn’t a bad deal at all for advisors, but Wall Street firms were losing out. The reason was that top producers with a couple of unhappy clients wouldn’t mention that fact, and may even seek out new deals to compensate for an impending drop in production. Hypothetically, “If I had 10 clients generating $5 million in production and I knew one or two were angry with me, that could mean a 20% drop in production,” Spears explains. “So I’d talk to a firm that didn’t know about that, just about the $5 million in production. When I get there these clients leave and I don’t have the revenue and the person who wrote the check has no way of getting the money back, I just have to wait five years.” In effect, the advisor has that time to build his business back up with the comfort of knowing he has $5 million in the bank to cushion the transition.
Wall Street’s response was to drastically extend the golden-handcuff period from five years to seven or nine years. It also changed the wording of the contract so an advisor who said he’d bring 10 clients and brings only eight would see a corresponding drop in signing bonus. “With all the strain on Wall Street and the banks, they need the advisors and their clients but they can’t afford to make the mistakes that didn’t really show up before when they were doing well,” Spears says.
Now, while the payout seems to be 300% of your trailing 12, the deal is multi-phased. Advisors have to bring a certain number of clients with them; then they have to achieve a certain increase in production; then they have to grow their assets. “If you hit those milestones, you can make more upfront, but it starts the clock again and adds more years,” Spear says. “It’s taken the risk out for Wall Street and has locked in good people for much longer.”
More common, though, is that the amount in signing bonus an advisor actually gets paid is a pale imitation of what he or she was expecting. (Some recruiters are taking advantage of the more complex bonus landscape and changing their business models accordingly. Spears says that one used to charge firms 6% of a broker’s trailing 12 for the placement; he now charges advisors a percent of the signing bonus for getting them the best possible deal.)
While top advisors still make more than the 100% of trailing 12 they used to bank, many—Spears interviewed 85 advisors—walk away with less than they expected into contracts that can tie them up for a decade.
The answer, Spears says, is for advisors to figure out their personal business plan first and then only accept an offer that furthers those goals. Then, while Wall Street firms tend to be much of a muchness these days, do your due diligence anyway. “Do as much homework as possible so you make the right decision the first time for you and your clients,” he says. “Good advisors recognize that their clients are fatigued by musical chairs.”
Above all, he says, “Be careful!”
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