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Caution: Offer On Table May Not Be As Good As It Appears

“Money often costs too much,” said Ralph Waldo Emerson.

For advisors looking to make a move, there could be any number of factors prompting the search for greener pastures. Do any of the following resonate?

  • You’ve outgrown your firm.
  • Your current firm continues to mandate cross referrals, more product sales or partnering with other lines of business.
  • They cut your payout grids or created minimum account levels.
  • They change (seemingly) just for change’s sake, and it is tough to understand the value of those changes to the client or the advisor.
  • Your current firm does not offer a full suite of products or services for you to truly take care of your clients.
  • You’re looking for entrepreneurial freedom to manage your practice with the expertise you’ve spent years developing.

The decision to transition your business is not to be taken lightly. In the same way you holistically evaluate wealth management strategies for your clients, so should you consider a transition of your business. You will likely entertain several opportunities and quickly feel like an all-star athlete who just hit the free agency market. Pause: This is where you should be careful of the blinding effect of the money, deal structures and packages that will be put in front of you. 

I’ll start by stating the obvious: Firms are trying to grow. This growth includes obtaining more accounts, households, assets, revenue and income. It means more product sales and grabbing a deeper wallet share of existing clients. This creates a competitive marketplace for good advisors in motion, and the market knows they don’t come cheap.

My recommendation to advisors is to pause, take a breath and look beyond the upfront check that firms are offering because these bonuses come with a cost. Unfortunately, some firms will tell recruits whatever they want to hear. This is because they know once the recruit joins the new firm, they will be locked in to a forgivable promissory note and will be unlikely to put their clients through another move in the near future. Some call the deals negligent, some call them intentional misrepresentations but, unfortunately, they can be common in the recruitment process.

Upfront recruiting checks are almost always delivered as forgivable loans (a debt to be paid off through growth and fee production for the firm). But there are additional costs associated with these loans that may not be immediately obvious to the advisor. Think of this as you would a balance sheet. Is it preferable to grow your cash flow through revenues or through liabilities? You would likely not counsel your clients to raise cash through borrowing unless absolutely warranted, so why would this be a sound approach for you?

Here are some things to consider from a tax perspective. The interest on the loan is taxable income, causing you an additional tax burden. In the year you receive the up-front compensation, you will not only be pushed into a higher tax bracket; in some cases, it could quality you for the alternative minimum tax. And compared to earnings resulting from higher payouts received as monthly cash flow, this compensation will incur these extra taxes, which effectively net you less money.

Advisors will often look at the upfront bonus as a source of freedom, but I see it as an additional obligation. Upfront compensation is usually applied to a 5- to 10-year contract. Often, we all have the best of intentions to save and invest that compensation. But, as we all know, reality and competing priorities (both personal and professional) usually drive some portion to be used early in an advisor’s transition.

On the professional side, an advisor could end up using that compensation to buy out an existing agreement or partnership, spend the funds on up-front marketing costs, or use the money to supplement for the loss of cash flow you experience while clients convert with you to a new firm. On the personal side, advisors could spend the compensation on family or household needs, or even go overboard in rewarding themselves.

In the honeymoon period of being recruited and joining a new firm, the multitude of long-term circumstances which could change (either in your life or in the firm’s policies) are often overlooked. These can include:

  • Changes to payout levels.    
  • Advances in capabilities by competitors.
  • Changes in leadership and ownership structures.    
  • Need/desire to relocate.
  • New incentives and requirements for cross/upsell.
  • Desire to move from W2 employee to independent.

All these factors could potentially place a significant advantage or disadvantage on the advisor and their clients because of their inability to move and react. Remember, a lot can change in a firm, the industry or personally in 7-10 years. Think about technology and your business 10 years ago and how different they are today.

Ultimately, an advisor’s clients should be top priority. We all seek to establish sound strategies for our clients. That said, market conditions are not predictable or within our control. Often, the types of compensation agreements discussed are tied to converting and maintaining a certain level of client assets under management.

Under periods of market contraction, clients’ performance and an advisor’s own performance are under pressure. The type of agreement discussed here will compound the pressure at a time when the advisor is least able to influence it. Additionally, if these firms make changes to payout and compensation agreements, install incentives for cross selling and upselling, and raise deferred compensation amounts, they are further controlling the advisor’s ability to meet the conditions of the upfront compensation.

Here is my position.

If you are an advisor considering a move, I challenge you to think beyond basic factors. Instead, reflect on the attributes in a firm that will provide you and your clients with long-term happiness and success. I would perform due diligence and make sure the deal you are taking is understandable and obtainable, and that there aren’t any items they are trying to camouflage.

The best way to do this may be to seek the advice of legal counsel with experience in the securities industry to help ensure you are doing everything you can to protect you and your clients’ best interests and understand what you are signing up for. Do a lot of soul-searching to find out what you really want in a new firm so that you can articulate your “why” to your clients.

Ask yourself some questions:

  • Does the new firm and its management walk and live their values?
  • Do they have a history and culture that allows you to put your clients at the center of your universe?
  • Does the firm truly allow you to run your business your way? Will the firm value you as an advisor?
  • Do they have the infrastructure, products and services that fit your practice?
  • Can you see yourself there for the long term?


By taking time to evaluate the landscape, to think about cash flow and balance sheet implications, and to never confuse deal shape with deal economics, you will end up with a peace of mind that, in many ways, is priceless.


Some Financial Considerations

Upfront recruiting checks are almost always delivered as forgivable loans. But there are additional costs associated with these loans that may not be immediately obvious to the advisor.

  • While you aren’t typically obligated to pay interest, the interest is taxable income and is an income source not withheld, causing an additional tax burden on the advisor.
  • The year the up-front compensation is received will not only push you into a higher tax bracket; in some cases, it could qualify you for AMT, even after the tax policy changes enacted in 2017/2018.
  • Compared to earnings resulting from higher payouts received as monthly cash flow, this compensation will incur these extra taxes, effectively netting less.

Upfront compensation is usually applied to a 5- to 10-year contract. Often, we all have the best of intentions to save and invest that compensation. But some portion of it usually ends up being spent early in an advisor's transition.

  • Buy out of an existing agreement/partnership
  • Up-front marketing cost
  • Supplement for loss of cash flow while clients convert with you to a new firm
  • Family and household priorities (taxes, paying down debts, college savings, etc.)
  • You go overboard in rewarding yourself

Ashley Folkes, CFP, CRPC, RICP, is a senior vice president of investments and complex manager at Moors & Cabot Investments. He has more than 20 years of experience in wealth management and has held several different leadership roles. He may be contacted at [email protected] [email protected].


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