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Now May Be the Time to Switch Firms

Switching firms can be an uphill battle. It's never an easy task, no matter what your reasons are for jumping to the firm next door. You can be making the best decision for your clients and your business, but crossing 10,000 t's and dotting 10,000 i's can be quite daunting, even for the most astute advisors and their transition teams. Simply said, it's not an easy process.

Ever since I entered the recruiting business in 1994, there has been talk that FINRA should regulate upfront bonuses or accelerated payouts. But I fear such regulation has never been closer than it is today. With compliance officers running amok with expanded powers and responsibilities, the privacy of the financial advisor is now in jeopardy. Various recruiters have come out to say that it will all be fine. I say, not so fast!

If, in fact, FINRA requires disclosure of all checks of more than $50,000, an already complicated matter will become even more complicated. If you have contemplated making a move in the next three years or so, do it now, before regulators turn you and your book into a sitting duck just waiting to be sued by anybody who may be having a down year.

Do doctors or lawyers have to let patients or clients know about a pending check or bonus upon joining a new practice or organization? Absolutely not, and it's probably none of their business. To me, an upfront bonus may signify that the person is an integral part of a company, but it clearly doesn't tell the whole story.

Take Deborah, for example. Deborah is a $2 million producer living on the West Coast with 22 years in the business. She has $240 million in assets and works with a junior producer who is producing around $150,000 with another $18 million in assets. Deborah manages 400 accounts and has approximately two years left on her current deal. She would owe her current company about $300,000 if she left.

Deborah's main issue with her current firm is that it is not offering the support it initially told her she would get if she reached the $2 million production threshold. While Deborah's rate of growth has been relatively high, she needs significantly more help in the back office to reach her full potential. At just 49 years old, she's still in her peak earning years and wants to capitalize on her developed expertise. She could do this with the support of an additional assistant. While the current marker per assistant is around $1.4 million in production, Deborah's combined production with the junior advisor warrants at least half an additional assistant, if not more. Ultimately, Deborah's case for moving revolves around an increased level of customer service for her clients.

If Deborah receives a check for $2.5 million to walk in the door at a wirehouse, her clients would be advised of her bonus amount, but what they probably would not see is the potential drop-off in business and the fact that her contract is nine years long.

Because Deborah is afraid of the impact that disclosures may have on her clients, she is now seriously entertaining a move in the first quarter of 2013 rather than waiting until the third quarter of 2015. Deborah may well save herself some major headaches in the long run if she were to make a move now versus two and a half years from now.

FINRA's original reason for looking into increased payouts and upfront deals was that an advisor might churn his or her accounts before and after a transfer to take advantage of the deal structure. In Deborah's case, however, her increased production has come from totally new relationships. FINRA's churn philosophy should really be focused on low-end producers who have become desperate.

If Deborah is required to disclose her upfront bonus, how will FINRA account for all that she has lost? In Deborah's case, she will have to repay $300,000 to her current firm and then won't be receiving the tentative $600,000 in deferred compensation that would vest in 2015 if she were to stay.

One point that has made Deborah contemplate pushing her date up is that she doesn't want to offend some of her smaller clientele who have been with her since she started in the business. In light of the recent war on members of the 1%, some clients may be upset to get a letter stating that their advisor is getting a check for $2.5 million because of their potential future fees. That $2.5 million may feel as if it's coming directly out of their pocket, even though their account is worth only $200,000.

FINRA hasn't suggested disclosing back-end bonuses yet, so in Deborah's case that may be the way to go. Sure, it's nice to get a big fat check when you walk through the door. But if the firm will pay you a bit more on the back end, it may well be worth it.

Would Deborah's numbers entice clients who have been disgruntled after a market drop to go after her in arbitration because she now has real assets in their eyes? Will this increase her likelihood of being named in arbitration? My thought is yes. The rich gal is a more enticing target than the poor one.

Instead of suing just the company, perhaps suing both advisor and company will now be the new normal. How much more will Deborah have to pay in errors and omissions insurance? The premiums are already exceedingly high, but, if enacted, these regulations could make them prohibitive.

Moreover, who's to say that the type of deal that Deborah expects will even be there in a few years? Assets are leaving the wirehouses, and eventually the deals are likely to become less generous. It seems possible that compliance officers will soon be putting pressure on recruiters to reduce the upfront bonuses they are offering. Top deals are now around 150%. If Deborah decides to take a wait-and-see approach to her move, she may not be as well compensated for having suffered the consequences of the lack of back-office support.

While Deborah runs a reputable practice and wants to do the right thing by her clients, FINRA may end up punishing her and harming her practice by putting out her private matters for all to see. It only takes a couple of bad eggs to ruin the batch, right? Don't 10% of your clients cause 90% of your problems? When 2015 rolls around, that 10% will be much more difficult to deal with. Do yourself a favor and jump while the jumping is good.


Carri Degenhardt-Burke runs Degenhardt Consulting in
Jersey City, N.J. For further information, call
201-395-0222 or visit www.degenhardtconsulting.com.

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