Merrill Lynch recruiting pullback: Regionals and breakaways eye opportunity

Register now

Merrill Lynch plans to scale back from adviser recruiting, mirroring a move that UBS took last year and creating an opening for smaller rivals to gain an edge in the competition for top talent.

Merrill has been informing managers that it will cease recruiting experienced advisers by the end of the month, according to people familiar with the matter. Instead, the firm will focus on attracting young advisers with three to eight years of experience. Merrill will offer potential new hires a guaranteed salary for three years, plus comp grid and bonus, a person with knowledge of the changes said.

Competitors and recruiters were taken aback by the new policy. Bill Willis, a Los Angeles-based recruiter, says the battle for adviser talent is like a poker game.

"Certainly, it's always nice when one poker player folds and it's down to two or three players. It's a strong hand out of the game," Willis says.

The recruiting landscape has changed dramatically over the past year. Among other changes, the big firms cut the size of their transition deals last year in response to additional regulatory guidance on the fiduciary rule from the Department of Labor. Multiple managers and executives at regional brokerages and independent firms say these changes could benefit them.

"The lower the upfront sign on bonus for wirehouse advisors, the quicker the economics of independence become more advantageous," says Shirl Penney, CEO of Dynasty Financial. "We are seeing the crossover point now to be about three to four years where the higher cash flow of operating your own RIA becomes larger than taking a recruiting package from another wirehouse."

Dynasty and other firms that help wirehouse advisers go independent have notched impressive growth in recent years, sometimes assisting billion-dollar wirehouse breakaways.

"When the deals were so large, they were obviously attractive. And some advisers prioritized that economic benefit above more independence and control," says Kimberly Papedis, head of national sales and platform strategy at HighTower. "On the other hand, I find that a lot of advisers we are speaking to now, we always ask, 'Who are you looking at competition wise?' It's less and less another wirehouse."

However, many advisers opting to leave wirehouses and go independent are often motivated by non-financial reasons, says recruiter Danny Sarch. "I'm not saying money is unimportant, but it's not everything," Sarch says.

Other industry players also see opportunities to cash in on Merrill's departure.

Regional brokerage firms, such as Raymond James, Stifel and RBC, traditionally offer smaller bonuses than the wirehouses. A branch manager in New York, who asked not to be named, says he's often been close to sealing a deal with a potential recruit, but ultimately loses out because Merrill or another wirehouse could offer double what he could.

"The delta was so wide, the recruit would say, 'It just makes no economic sense for me to do this,'" the manager says.

The delta, however, has been narrowing in recent months as wirehouse deals were slashed in response to the fiduciary rule. Pressure has also been mounting on wirehouses to cut back on expenses in order to boost profit margins.

"We have seen deal compression due to competitor changes and DoL that helps to level the playing field for our firm. Now our entrepreneurial culture is not competing with deal structures that make no sense to shareholders," says John Pierce, head of recruiting at Stifel.

In recent years, adviser headcount has ticked down at the wirehouses. Their regional counterparts, however, have been growing through a combination of acquisitions and aggressive recruiting. Raymond James has boosted its headcount to over 7,100 independent and employee advisers, edging past UBS earlier this year.

Andy Sieg, head of Merrill Lynch Wealth Management, said in April that he aims to grow the firm's brokerage force. That goal hasn't changed, according to a person familiar with the matter.

The firm will continue to add advisers through other efforts, such as its training programs. Though the firm will offer young recruits a salary as a glide path into the profession, Merrill does not intend to eliminate the grid common to many adviser compensation plans, this person said.

Merrill, which also relaxed its ban on commission-based retirement accounts, had been piloting a recruiting model for young talent in Chicago, and has had some success.

“The senior recruiting is on pause – we will remain in discussion with strong established advisers at other firms who understand the power of the ML and BAC platform. We will be developing a new incentive package for these hires – details not available yet," according to a source at the firm with knowledge of the matter.

The firm may also have been prompted to pullback from recruiting after seeing UBS' success, Willis says. Its brokerage force shrank 2% year-over-year to 6,969 for the first quarter, but pretax profits rose 42% to $302 million.

UBS has not completely pulled back from recruiting; it still hires top talent, but selectively.

It isn't clear if Wells Fargo and Morgan Stanley will copy Merrill's example.

"I think they'll see it a tremendous opportunity," says Mindy Diamond, a recruiter in Morristown, New Jersey. "I'd be shocked if they followed suit."

For reprint and licensing requests for this article, click here.
Recruiting Wirehouses Wirehouse advisors Going independent Regional BDs Merrill Lynch Hightower Dynasty Financial Partners Stifel Financial