It is mid-October as I write this and the stock market is falling faster than the leaves on the trees. There is no shortage of news about the beleaguered financial services industry.

Bank of America took over Merrill Lynch in a weekend. While those advisors were still waiting for their retention package, Merrill was hiring several large producers at a level that was sure to be some multiple of what its current advisors get! Meanwhile, those current Merrill advisors observe Bank of America struggle to raise new capital. Not exactly confidence building or trust building.

Wachovia was in a tug-of-war with Citigroup and Wells Fargo, while the advisors from Wachovia scratched their heads. Amusingly, the Wachovia advisors are referred to in the mainstream press as the "AG Edwards advisors." The legacy Prudential-First Union advisors are simply ignored. Finally, Wells Fargo declared victory when Citi backed out. I'm not an expert on the banking side, but it seems to me that, in hindsight, Wachovia paid top dollar for AG Edwards brokers at the height of the market. As a group, they were among the least productive in the industry and many of the best ones have been picked off by competitors.

Wells Fargo advisors will likely be the ones who have to switch over to the Wachovia technology. Good luck to all.

Smith Barney consolidates regions and shutters dozens of offices around the country. Morgan Stanley sells a chunk of itself to Mitsubishi Bank, converts to a commercial bank, struggling to stay independent. Lehman is gone, as is Bear Stearns.

What does all of this mean for the "Recruiting of Financial Advisors" market? There's no listing on CNBC or inThe Wall Street Journal on what a $1 million producer or a $500,000 producer is worth today, so I'm going to give it a shot.

What Made Deals Go So High?

It comes down to supply and demand. The industry has had a terrible time training new advisors over the last 10 years. First, the country has had a severe labor shortage so finding qualified candidates is harder than ever. Second, new advisors are not allowed to cold call 200 times a day in order to build a book. Instead, they are expected to have a ready network of prospective clients to start calling immediately. Because the industry was attempting to attract older, more sophisticated business people, financial companies had to pay them much more than they had historically paid rookies. Yet, the success rate never really improved beyond one-fifth still being with the firm five years after graduating from a wirehouse training program.

At the same time, advisors retire, die or move to the competition. Empty desks are a waste of resources, of course, so in order to grow in a given market, branch managers were told to recruit at all costs. This industry has always attracted hyper-competitive type-A personalities who hate to lose.

As a result, mini-wars broke out among firms. A regional manager or divisional manager would instruct his branch managers to strike back at the firm that was raiding them with higher and higher deals. When a talented and/or charismatic manager was recruited, he or she had a ready stable of advisors ready to follow their ex-boss. The losing firm retaliated in either the same market or somewhere else around the country. And on it went.

In addition, as the industry thrived, the stock prices of the public firms in this space grew accordingly. In order to make deals attractive, recruiting firms needed to come up with higher and higher deals just to make up for what advisors would be leaving behind if they departed their old firm.

So What's Changed Now?

For the first time ever, supply is meeting and even outstripping demand. And for the following reasons, I believe there will be a growing oversupply that will actually drive down the values in this "Recruiting of Financial Advisors" (ROFA) market.

• Bear and Lehman went out of business. Wirehouses had their venerable names tainted in the trade press as well as the mainstream press. Advisors now consider it irresponsible not to interview. And, they know where they might want to go. More advisors are interviewing than ever before.

   

  Result: Oversupply will drive down the value of the ROFA market.

• All the wirehouse stock prices are worth a fraction of what they were a year ago. If we accept the hypothesis that one of the factors that drove the deals up was the unchaining of advisors from golden handcuffs; and since those golden handcuffs are now worth a fraction of what they were in years past, deals based partly on golden handcuffs must come down.
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