So much recruiting — what’s driving all these advisor moves?
There has been an upsurge in advisor moves for two basic reasons: A realization that the bull market will end one day and concerns about looming industry changes.
There’s a sense that although the business climate is favorable now, but veteran brokers know nothing lasts forever. Going forward, the advisory business could get more difficult. Potential fee compression is one issue. Lower fees mean that advisors need to control more assets to generate the same level of gross production.
Prognosticators have been betting that the bull market would end for about six or seven years. But this time, more advisors seem to have taken it to heart that bull markets don’t last forever. Globally, there are signs of economic weakness. Eventually that is bound to hurt stock prices and the value of advisor practices. In down markets, advisor AUM often drops and with that the gross revenues that they produce. Many are thinking this is a good time to get the best offer to change firms. On top of that, advisors are concerned that fees may be declining and that regulators are about to announce changes to the way things work (for instance, see the SEC’s proposed Regulation Best Interest). Who knows what that will bring? All these uncertainties make it a good time to take a deal or to boost your net payout by going independent.
Advisor recruiting deals remain strong. Wells Fargo is offering a big upfront recruiting packages, and several independent broker-dealers have juiced deals to unprecedented levels. But it’s not clear how long hiring bonuses will remain at these lofty levels. A number of wirehouses have stepped back from aggressive recruiting. Merrill Lynch is targeting only talented up-and-comers. UBS and Morgan Stanley are hiring seasoned million-dollar-plus advisors sporadically, at best. Advisors are wondering whether other firms will pull back their recruiting deals, especially if the markets turn south.
Meanwhile robo advisors charging dramatically reduced fees and are picking up assets at a head-turning pace. According to data from PriceMetrix, the average fees for full service financial advisors dipped from 1.13% in 2014 to 1.04% in 2017. (These are fees for new accounts for households with managed assets of $1 million to $1.5 million.) Price Metrix also notes that despite the stellar performance of top quartile advisors, new client growth across the industry is largely flat. New household relationships per advisor were 8.1 in 2014 but only 7.6 in 2017.
At Schwab, investors can pay $360 per year and get investment management via the firm’s robo offering, which includes a financial plan and access to a certified financial planner.
Vanguard’s Personal Advisor Services robo advisor, which charges just 30 basis points on assets, has been a runaway success, attracting $115 billion in assets in just a few years. At some point, this might put downward pressure on full service advisor fees even though they may be providing a broader array of more complex services.
The rules of the game are in flux as well. The SEC plans to issue its proposed standards for advisor conduct in September. Advisors and clients were hurt when Department of Labor rolled out the fiduciary rule in 2016. Firms were forced to limit their investment choices in retirement accounts to insulate themselves from lawsuits that the old rule encouraged. Clients missed out on the choices.
Since SEC Chairman Jay Clayton is a Trump appointee with extensive business experience, I expect that the commission’s rulemaking this time around should be more realistic and more benign. But we won’t know for sure until we see the details of their finalized best interest standard, so a key component of the regulatory format for advisors remains up in the air.
Given all these uncertainties, many wirehouse advisors have concluded that it’s a good time for them to pocket a recruiting bonus or boost their payout by going independent. Plus, it’s not lost on advisors that if you’re going to make change it’s easier to do so in a bull market when their client portfolios are more likely to be up.