So here we are, at the midpoint of the year. And the question I am asked more than any other during my everyday discussions with brokers is "where are the deals going next?" These days, the buzz is all about the 200% number, but let's look around the corner to the future while still keeping the past in mind.

Why Are the Deals So Huge?

A wise friend of mine who makes a living as a money manager once told me, "Sarch, take any economic problem, and 90% of the time you can frame it and solve it based upon supply and demand." You remember your Econ 101 class, right? Reduced supply and increased demand mean prices go up.

After the market's peak in 2000 and following the events of Sept. 11, 2001, our industry dramatically slowed its training. Virtually all of the major firms reduced their training programs. Those initiatives have been ramped up in the last several years, but the fact remains that there are very few brokers still practicing today who were trained in the 2000 to 2002 time frame.

The wirehouses are encountering the same labor-shortage problems as the rest of the country. The pool of rookies is simply smaller than it used to be. It's also tougher than ever for a rookie in this industry to succeed. Twenty years ago, a broker could build a book with just sheer work ethic. Rookies were taught that if they honed their skills and dialed the phone 200 times per day, the result would be a viable business. Nowadays, few (if any) are building a business this way. Instead, wirehouse training programs are attempting to attract professionals in other industries who have a center of influence among affluent investors.

Demand has increased as well. Every brokerage industry manager in the food chain gets rewarded for growing a business. They can do that in two ways: via same-store sales (that is, by the existing brokers becoming more productive), or by recruiting new brokers. You can see the desperation growing in the industry on both of these fronts. Throughout the day, you may be flattered, admonished, encouraged, pushed and prodded to build your business in a variety of ways. And you may also receive calls from external headhunters, internal recruiters, sales managers and branch managers several times a week.

The price of recruiting--as defined as the average package offered to the average recruit--is the highest it has ever been. (Note to self: time to start raising fees!)

External forces have helped in this regard as well. At the end of 2004, three major brokerage firms agreed on a protocol to be followed when an experienced adviser moves from one of those firms to another. The losing firm agreed to refrain from suing the acquiring firm or seeking a Temporary Restraining Order (TRO), which used to limit the broker's contact with his clients. Not all the firms have joined this pact, yet TROs are much less common than they were two years ago.

Cost-basis data now transfers from firm to firm when a client's account moves. Just a few years ago, the transferring rep's staff would have to spend hours entering in cost-basis data when the accounts were opened at the new firm.

Finally, at least as of this writing, the markets have recovered to the point where brokerage firms are comfortable spending money. And brokers are confident that their books will move with them when they leave for another firm.

So What Happens Next?

While the industry remains strict on criminal, credit and compliance issues (see my June 2006 column, "Skeletons in the Closet"), firms have actually loosened up on other subjective criteria. For example, frequent jumpers from one firm to another have historically been frowned upon. It used to be a rarity for a broker to get a deal to return to the firm that he left several years earlier. But pressure to hire is winning out, and the ultimate criterion is the caliber of the broker's business. Hiring those who departed years ago is no longer verboten and is being looked at on a case-by-case basis.

I also don't see the value of the deals decreasing. Frankly, since the deals hit 50% some 10 years ago, brokerage industry management has complained that you can't make money when you recruit. Yet the deals keep going up! The top candidates, in my opinion, will still command top dollar.

Don't Get Too Cocky

Remember the Tully Commission report? In 1995, Daniel Tully, then Merrill Lynch's CEO, led a commission that issued a best practices report on the retail brokerage industry. It's impressive how prescient that report was. For example, it discouraged proprietary products. It predicted that the industry would move away from transactional business and head toward fees. It also said that clients should be notified of the upfront incentives that lure reps from one firm to another.