The market meltdown of 2008 and mergers of financial firms that followed are beginning to feel like a distant memory. What remains in the present are the retention bonuses paid to a substantial portion of the financial advisor population.

At this point, it's worth questioning what was then a popular strategy. Have these programs provided the desired impact thus far? Will they continue to be effective? And finally, what lasting effects will they have on our industry?

From my perspective as a recruiter in this space, I can confirm that retention bonuses have dramatically slowed movement. The pace of recruiting activity was substantially lower in 2009 through 2011 by all measures and accounts. Whereas these bonuses keep some out of the market, let's not forget that we had unprecedented movement in 2007 and 2008, and most of those movers remain encumbered by the terms of their transition compensation packages. So the combination of retention programs and upfront bonuses has led to a relatively stable time in the industry.

In this regard, firms have succeeded in the goal of holding advisors at their reengineered firms so that they could have the time to indoctrinate their teams with the firms' developing cultures. Our firms are hoping that this new corporate culture will regenerate the loyalty that existed in the past. Yet, the success of this effort remains to be seen.

One problem caused by retention bonuses has been the cost and its impact on earnings. With some of the most productive advisors receiving bonuses in excess of 100% of their trailing twelve (T-12), variable expenses have soured. Firms typically account for such expenditures by amortizing them over the life of the associated note.

With most of the retention notes being either eight or nine years long, the effective cost translates to a 10% or greater rise in payout. So larger producers who might be paid 45% on the grid plus another 5% deferred now could add another 10% relating to retention expenses. As a result, the bonus system has added 20% to the firms' annual costs!

One could rightfully argue that these arrangements are far more frugal than if a firm was forced to fill empty seats exclusively with recruits from the competition. If we continued with the fruit basket turnover of 2007 and 2008, advisor expenses would be even greater. With deals now north of 300% the amortized cost exceed 30% per annum. It is hard for most firms to find any profitability employing these mega-deals.

So what's happening now? Beginning in the fourth quarter of last year and continuing this year, recruiting activity is picking up. The reasons are clear. Every firm we are in touch with wants to grow; yet industry-wide there is little organic growth. Our aging advisor population is diminishing and the industry is not doing a great job replacing those who we are losing to retirement, burnout, or death. The heat is on managers who must recruit or perish.

The spurt in movement that we are currently experiencing might be the beginning of a long term trend or just a short term phenomenon. Current conditions are attractive. Advisors are producing good investment results, creating confidence that clients will follow them. Firms are offering the biggest packages in history. And at least for some, the amortized amounts that advisors now owe their firms can be adequately covered by the generous bonuses being offered.

Maybe what we are seeing is the result of pent-up demand finding reasonable opportunities or perhaps this is only the beginning of another era of movement. Those firms who have most effectively regenerated compelling cultures will enjoy the greatest retention. However, at this point there seems to be no clear winners or losers.

As I consider the psychological impact of paying all of a firm's most productive advisors a huge bonus to stay, I wonder if we have not created an entire generation of deal junkies. Consider, first of all, that these bonuses were almost forced on advisors. Those who were reluctant were questioned and ultimately almost everyone eligible took the money. Now with that money spent or hopefully invested, all that is left to do is pay the taxes and watch the balances amortize. As deals conclude, will advisors expect to be paid again?

So far retention packages have been effective, but the long term outcome is dependent on execution. The challenge facing our firms is to create a culture that inspires advisor pride and loyalty; a place where advisors passionately feel that they and their clients are best served.


William P. (Bill) Willis is founder and president of
Willis Consulting Inc., a financial services recruiting
firm based in Palos Verdes Estates, California.