What wirehouse advisors must know before going indie
Independent planning firms will need more than 200,000 new advisors over the next 10 years to replace the baby boom founders who are now in their 60s, according to calculations by Mark Tibergien at Pershing Advisor Solutions. But where are they going to come from? College programs are graduating hundreds, not thousands, of new advisors.
In a free and vibrant economy, nature has a way of filling the vacuum, so I expect the demand to be met. When I look for possible candidates, my eyes tend to fix on 277,000 people currently in the sales environment at wirehouses, banks, regional brokerages and independent broker-dealers.
There are more than enough of them to fill the void, they’re trained in financial services, and the brands they currently work for have been irrevocably tainted by scandal after scandal.
Better yet, the brokerage firms have basically called a truce in the recruiting wars, in the form of the Broker Protocol, which says, in essence, ‘I won’t slap a temporary restraining order on the brokers you recruit from us if you won’t take legal action against the ones we recruit with you.’
The important thing to know is that the Broker Protocol doesn’t just extend to brokerage firms.Almost anybody can sign onto the protocol these days, including advisory firms, and the basic rule is that the departing brokers can take their client contact information when they leave and nothing else.
Even better, it’s getting much easier to move clients, what with all the e-signature technologies, automated document creation and the fancy new automated self-ACATS processes that the automated online investment firms are pioneering.
PROCEED WITH CAUTION
Simple, right? So I asked Brian Hamburger, CEO of law firm MarketCounsel in Englewood, New Jersey, for some tips on exiting the brokerage world and recruiting brokers. MarketCounsel has become the leading law firm for making sure that recruiting stays on the right side of the legal issues. I soon learned that even with self-ACATS and the protocol, refugees into the fiduciary world still have to proceed with caution.
When a broker first reaches out to an independent firm, the first step is to assess whether this person intends to start a new firm or “tuck into” an existing advisory, says Hamburger, “We try to figure out if this person has any appetite for the details of running a business,” he adds. “Like: who’s going to make sure there’s coffee in the break room? What type of font should be on the business cards?”
If the brokerage rep would prefer to have someone else handle the business details, MarketCounsel, will reach out to its recruiting contacts — including the institutional custodians who have compiled lists of firms looking for advisors with client-facing experience, and who’ve built in-house transition counseling.
The idea, Hamburger says, is to get the rep connected with a firm before starting the exit process. This helps create a legal engagement that protects both the firm and the transitioning broker.
Then the lawyers dive deep into some very thick weeds. Sharron Ash, MarketCounsel’s chief litigation officer, will start the conversation with timeline issues. “Are there circumstances that we’re navigating?” she says. “Is this a voluntary departure? They may be coming up on the expiration of a nine-year deal that they signed, and now is the time for them to realize their dream of doing something different.”
Hamburger says that many brokers have signed a variety of agreements without reading the document, similar to the way you and I click on software agreements without having a clue what they obligate us to.
“They have employment agreements, and signed agreements in connection with some type of retention bonus or some other type of financial performance incentive,” adds Ash. “They may have signed some type of team agreement where they cooperate on certain accounts. They may have clicked through certain acknowledgements and certifications that correspond with their compliance manual.”
Ash and her team will delve into those agreements. “The most common is new restrictions on their ability to solicit their clients,” she says. “It could be a new version of their deferred compensation agreement, where they just click on the ‘I agree’ button. We look at whether the agreement is enforceable. Did they actually receive consideration, or did the company just say, unless you click on this, you’re going to be fired?”
WHAT NOT TO DO
Then MarketCounsel lawyers plan a smooth, legal exit. This starts with the Broker Protocol. The key to the protocol is how the broker handles the exit and what information the departing broker can exit with.
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“You cannot tell your clients you’re about to leave and where you’re going before you actually do leave the firm,” says Ash. “The minute you even suggest that there could be a departure on the horizon, you’re creating a hazard that could prompt a dispute.”
She says that sometimes even if you follow the protocol, the firm will have access to legal obstacles. “What if you have shared accounts?” Ash explains. “What if you’ve inherited accounts? What if you’ve purchased a retiring advisor’s book? What if you have a revenue-share with a team member who is not going with you? What if you have a revenue-share with a specialized advisor in another part of the country? If you put on your protocol list clients who you are not supposed to solicit, you can have your ability to use the protocol is challenged.”
THE BILLBOARD SOLUTION
In those cases, Plan B would be to use public advertising or networking to let clients know that you left — and where to find you. “We had some folks who could not use the protocol,” says Ash. “So there was a billboard that clients were going to ride by every day, going not only to their old office, but the office where they were plunking down their new real estate. It was a perfect billboard to put up an ad, and they put their pictures on it.”
Ash says that in her experience, brokers aren’t leaving for a higher payout. “When you ask them why they want to go independent,” she says, “you’re going to hear things like: they’re tired of the restrictions; they don’t like the conflicts of interest; they no longer want to sell conflicted products or feel pressure to sell certain things. They are going to be answers that are very client-centric in nature.”
Hamburger says that the firms that have most successfully tucked in ex-brokers are able to tell a story that resonates with them, a story about the values of the organization, the benefits they provide to clients, their commitment to service and growth and technology and personal development.
I asked Hamburger what percentage of clients will follow a departing broker to the new firm? “Are we talking about the clients that the broker wants to take?” Hamburger asks. “Because we tell them that this transition is a great way to pare down their book to the people they really like working with.”
Okay, then: the percentage of clients the broker wants to take.
“More than 100%,” says Hamburger. Meaning? “In our experience, almost all the clients come over, because the relationship is with the broker, not the firm these days. And all of a sudden,” he adds, “they bring out money they were hiding. And they say, ‘we’ve been waiting for you to make a move like this, and now we feel an extra degree of trust.’”