Displaying items by tag: independence

There is a subtle distinction between fee-based and fee-only advisors. Fee-only advisors exclusively offer financial advice but don’t sell any products with commissions. Fee-based advisors also mainly offer financial advice, but they may also sell other non-investment products with commissions, like insurance. This means that they cannot market themselves as being ‘fee-only’. 

Many advisors are moving to these models due to their simplicity, while there has been an increase in regulations around the fiduciary standard. In fact, the industry as a whole is seeing fewer broker-dealer accounts and growth in investment-advisory accounts. As a result, many products can now be bought in investment-advisory accounts without a commission, such as annuities and alternative investments. 

An important consideration for an advisor going independent is responsibility for compliance. This requires registering with the state regulator or the SEC if there are more than $100 million in assets. It also means responding to regulatory inquiries, developing a compliance program, and having a system to ensure compliance. 

This additional burden highlights the challenge of running an independent shop. Another is that there is less time for clients, especially during the initial stages. Even afterwards, the additional responsibilities will lead to less time and energy for client service, prospecting, marketing, etc. By choosing a fee-only or fee-based model, advisors can have less of a regulatory burden.

Finsum: Many advisors are moving towards a fee-only or fee-based model. The biggest reason is that it simplifies and reduces the compliance demands for advisors.

When it comes to recruiting deals, there is much to analyze and understand beyond the upfront figure. In fact, how the deal is structured can be even more important in the long term, as this will dictate longer-term outcomes like growth, portability, succession planning, and compensation. 

Typically, the upfront payment is calculated based on 125 to 175% of trailing 12-month production. This portion is guaranteed and taxed at lower rates, so it’s understandable why so much attention is paid to this figure.

Many firms still offer back-end bonuses, which are generally around 25 to 50% of trailing 12-month production, although these are being phased out. These bonuses are only paid out if advisors successfully transition and achieve pre-defined metrics. Unvested deferred compensation replacement is another element becoming less common as this is increasingly folded into the overall package. However, this represents the amount that an advisor would lose out on by switching firms.

Finally, many deals will also include a ‘sunset program’ so that a retiring advisor can cash out of the business at market value. With this, there are many factors to consider, such as terms, requirements, and financing. For younger advisors, this might be less relevant, but it could be a deciding factor for those closer to the end of their careers. 

Finsum: There are many components of a recruiting deal that go beyond the headline amount. In fact, the structure of a deal can be more important when it comes to making the right choice.

Diamond Consultants recently completed the 2023 version of its Advisor Transition Report to identify the most important trends in financial advisor recruiting. Overall, recruiting was up 7.5% compared to 2022 which was unexpected given several headwinds. Many advisors who switched reported being more focused on the long-term to find the best place to maximize the value of their practice on a 5 to 20 year horizon.

Another interesting finding is that each channel seems to have a big winner. LPL enjoyed the most success from independent firms, while Morgan Stanley was the winner from traditional wirehouses. Boutique and regional firms like Rockefeller, RBC, or Raymond James also notched some major wins as they offer many of the resources of the large wirehouses without the bureaucracy. 

One catalyst for the increase in recruiting activity has been the expected involvement of private equity bidders. Yet, this hasn’t materialized in terms of PE-backed RIAs poaching talent from legacy players. One factor is that PE offers come with some caveats that make it less appealing to advisors. 

Finally, the lure of the independent channel seems to be fading despite the number of options increasing. This is likely due to traditional firms offering more generous compensation packages while the initial cohort of recruitees who wanted an independent channel have already moved firms. 

Finsum: Diamond Consultants put together its 2023 report on advisor transitions. Major takeaways are that recruiting remained strong despite some major headwinds and that PE buyers haven’t been successful in luring advisors. 

Wells Fargo’s recruiting efforts have been no secret, but it looks like it is starting to pay off. In Q1 of 2022 they brought in over $5.4 billion in assets under management. Wells had seen advisors flee as a result of various public scandals in the last few years. They had lost 1.5% of their advisors in Q4 of 2021 and 8.5% in the whole year prior. The firm has said they are more pleased with their recruiting efforts as of late, but they are still putting forth efforts in the hiring process to retain and recruit advisors.

Finsum: Wells Fargo may be turning a new leaf and the bonuses related to advisor recruiting and retention are bringing in more assets.

2021 set an all time record for American’s quitting with approximately 47 million opting to leave their jobs and giving the year the title the ‘Great Resignation’. However, financial advisors have remained insulated from the one off spike. Many say this has to do with how advisors see their business, and being their own practitioners. This holds many companies accountable for keeping advisors satisfied because they can take their book of business elsewhere. Still there have been a slight increase in quits but that's part of a broader trend over the last three years for financial advisors.

Finsum: Firms are definitely getting the message, and are increasing measures for both retention and hiring in order to grow scale and attract advisors.