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Industry Spotlight > Wirehouse Firms

Why Today's Retention Deals Won't Work

By Mark Elzweig

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In early 2009, three of the four major wirehouses rolled out advisor retention programs. Merrill Lynch, Morgan Stanley Smith Barney and UBS announced that they would provide their most-prized advisors with award packages designed to encourage them not to jump ship.

This was done in response to the 2008 market wipeout, which caused unprecedented broker job hopping. Many advisors fled their wirehouses with damaged reputations both to appease anxious clients and to replenish their own suddenly shrunken net worth.

A spate of mergers and senior management changes had quickly reshaped the wirehouse world. The new firms wanted to give their advisors a compelling reason to stay the course.

Merrill and Morgan Stanley offered $500,000-plus producers upfront packages ranking from 30% to 75% of 2008 gross as well as backend incentives tied to meeting growth hurdles. Backend payments ranged from another 25% to 30% of gross. These were structured as nine-year deals, with upfront bonuses to be paid out in January 2010.

UBS opted to pay its $500,000-plus producers and additional 2-9% of trailing-12-month production. The first six years was paid upfront, with the entire loan forgivable over an eight-year period.

How successful have these awards been in reducing advisor turnover, and are they a reliable long term strategy going forward?

Although retention packages changed the recruiting landscape for the moment, they are unlikely to be as potent as wirehouse executives would like.

One doesn’t have to be a math wiz to recognize the considerable spreads between the awards to stay and offers from competing firms.

Upfront deals at major wirehouses now range from 120-140%, with backend incentives that bring total packages potentially up to 200-300%.

Over time, as more of the upfront portion of these deals is forgiven, this spread will only widen.

Retention awards are viewed by many as risk-free and hassle-free money. They’ve ratcheted up the pain level that prompts a move.

Nonetheless, those advisors who decide to “hit the bid” will always come out way ahead.

As we’ve written before, broker demographics — the ever-shrinking pool of advisors who control large pools of assets — will keep recruiting deals at stratospheric levels for the foreseeable future.

New firms with aggressive recruiting programs are continuing to come into the marketplace, and we’re just at the beginning of the curve.

Still, the retention deals have caused some short-term changes in advisor movement.

This year, most of the large wirehouse teams received the upfront portion of their retention awards. Most have decided to stay and kick the tires at their new firms.

The lion’s share of the movement has been with producers in the $300,000 to $500,000 range who weren’t compensated to stay.

Those advisors who grossed from $500,000 to just under $750,000 received only 30% upfront to stay. There’s been some activity amongst this group as well.

Large teams have only selectively moved. One industry publication tracked 100 advisors with $22 billion in assets under management who changed firms in a recent 90-day period; most were wirehouse producers.

Advisors who move now want to ensure that they’ll be made whole on the upfront portion of their retention award. That has heavily skewed movement from one wirehouse to another, especially for the $750,000-plus crowd.

High-end boutiques with similar recruiting packages are favored destinations for this group as well.

Many advisors who produced in excess of $750,000 and were willing to take less upfront and joined regional firms in 2009, now simply can’t afford to do so.

Regionals typically pay frontend packages of 40-80%.

Cerulli estimates that 40% of advisors who leave wirehouses will join other wirehouses in 2010 and that only 23% will join regionals.

The much-touted stampede to independence remains largely an option for producers in the $300,000 to $500,000 range who don’t have to be concerned with returning retention award money.

Cerulli estimates that 20% of producers who leave wirehouses this year will join independent broker dealers. Similarly, Cerulli predicts that a mere 6.5% of wirehouse advisors who leave will opt for the RIA route.

Retention awards may have changed the recruiting landscape for the moment. But their effectiveness as a retention tool will wane faster than many people think.

Each year the spread between the retention awards and outside recruiting packages will only widen.

Wirehouses who want to ensure the continued loyalty of their advisors and limit defections need to stick with the winning formula that has served them so well over the years: a highly regarded brand name, cutting-edge products and services, and the support of product specialists and home office staff to deliver their platform .

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