Perhaps it‘s no surprise, but upfront money keeps hitting unprecedented levels.
I’ve heard of deals breaking 350% of trailing 12! Yes, that’s all in, typically for producers doing well in excess of $750,000 with many hurdles and targets needed to be achieved. But regardless, these number keep ratcheting higher and one does begin to wonder if these kinds of numbers make sense from both an economic and a physiological standpoint.
After all, when you pay producers “superstar” numbers it can go to their heads!
From an economic standpoint, these deals pay part of the money upfront, and since they are in the form of a forgivable loan, the producer is more-or-less indebted to their new firm for seven to nine years. For top producers getting wirehouse payouts, these deals still seem to make economic sense.
For the big firms, it really is all about AUM, and producers doing a million gross plus really deliver. The fact that most of the major firms rolled out hefty retention plans last year clearly showed their need to keep their top people and their assets (although perhaps “closing of the barn door after the horse has bolted”)
But after the turmoil of the past two years, so many wirehouse producers left their firms (or left the industry) for “greener pastures”- firms that weren’t in the news for the wrong reasons, and firms where their net worth didn’t fall off the face of the earth due to their ownership of stock of their previous employer. Some recent industry data indicates that 2010 trends will show of all wirehouse producers who leave this year, 40% will go to other wirehouse, 23% will go to regional firms (with much smaller packages), 20% will go independent through a broker-dealer and only 6.5% will choose independence as a registered investment advisor.
There’s no question that there has been less movement this year, and I expect even less in 2011. The tree really shook in 2008-2009 and those with even a little motivation, combined with big incentives, have left. Now, they have their packages, and are handcuffed, albeit, with golden ones. The wires will continue to find creative ways to structure incentive packages, and as long as FINRA and the IRS don’t object, I think the deals will stay at their lofty levels and perhaps go up slightly. More dollars chasing fewer big fish. The regional firms too will need to stay competitive and pick up more of the $350,000 to $500,000 producers.
For independents, it’s still is a matter of economics, and they are far less willing to offer more than 20-50% packages. For banks, while the economics are still important it’s also a matter of psychology. Banks don’t want “throw dollars” to attract producers, even if they’re doing a million dollars of gdc. Banks have done just fine attracting the kinds of producers they want, good producers, but who also fit their cultural model. The big players, BofA, Wells and other will continue to offer packages in the 40-50% range, but I don’t expect them to go any higher. And the smaller banks, with assets of 1-50Billion in assets, will continue to recruit the old fashioned way- by offering producers a less stressful home, good payouts, competitive benefits, and a steady stream of referrals.