Less is More in Broker-Dealer Transitions: Avoid the Sugar Crash!

Less is More in Broker-Dealer Transitions: Avoid the Sugar Crash!


By: Charlie Latimer, Director of National Recruiting
Published June 21, 2017

Attention advisors, here’s a counterintuitive thought to noodle on: If you’re seeking to transition broker-dealers or maximize your long-term economics, you should focus on the broker-dealer that provides the least amount of upfront benefits (aka, transition assistance). In fact, if you follow that simple rule, you will inevitably end up looking at variations of the independent business model. Let me explain.

Wirehouses, which provide the most exaggerated upfront packages (maybe 125% or so of trailing 12-month GDC), also provide the worst long-run economics, with payouts at 40%. Regional firms such as Raymond James and Ameriprise will offer something less than that upfront, but with a slightly higher payout, depending on whether you go with their “independent-type” option. Firms like LPL Financial will offer even less upfront money, but make it up with an ongoing much larger payout.

When you do the math, you’ll easily discover break-even points of only one to two years out versus the competing models with the higher upfront comp. Therefore, the differences in upfront packages end up being inconsequential. Further, after you pass that break-even point, say in year two, would you rather be at a 90%+ payout or a 60% payout or less? Clearly you want to be at 90%, so before you sign that deal with the higher upfront that locks you into a five-year or greater forgivable promissory note, think about the consequences. FYI, these deals are structured to benefit the BD, not you.

Go Independent for the Best Long-Term Outcome

The fact is, when you go independent, you are maximizing your ongoing payout, which creates rather lean economics for the firm you’re working with. It therefore follows that IBD’s in turn have less “juice” in the deal to provide those larger upfront packages. I understand the allure of the larger packages, as they can have an instant impact on one’s quality of life. But again, as an advisor to advisors, I repeat that such instant gratification becomes a fleeting moment as soon as you pass that break-even point afforded by the model providing the higher payout. In other words, you are setting yourself up for what I call a major “sugar crash”! The solution is to just trust me and go independent. Independence offers just enough—but not too much—sugar!

Another acid test to reverse engineer what I’m describing above is to confirm with absolute certainty whether or not you will own your clients and data at the BD that is courting you. If you do own your clients and data, then the upfront packages for that BD will definitely be smaller, but the payout will be much higher. That is, you are going independent! On the other hand, if the courting BD restricts you with a privacy policy on client information, or a garden leave clause, or another non-solicitation covenant, you can expect a larger upfront package and smaller payout, because you are not going independent. In fact, you are just selling yourself to another captive relationship. And when you try to leave for some reason, other advisors at these firms will be invited to call on your clients like seagulls chasing bait fish!

For more information about changing broker-dealers, check out our complete guide for advisors.