Using big bucks to attract top-notch talent isn't a new phenomenon in the financial services industry. But what was once modest monetary assistance to help a financial advisor move his or her book to the new firm has now spiked to unreasonable levels, says Andrew Marsh, president and CEO of Toronto-based Richardson GMP Ltd.
"Through the course of the past decade," says Marsh, "the dollar amounts - especially with the offers coming out of the banks - continue to get more aggressive year-over-year."
When Marsh first started recruiting advisors for GMP Private Client LP (prior to its merger with Richardson Partners Financial Ltd.) in 2004, standard bonus amounts offered to advisors for switching firms were 70%-75% of revenue generated in the previous 12 months by the advisor.
Now, those levels have skyrocketed to 150%-200% of revenue generated. And with consolidation in the industry continuing to rise, doors of opportunity are opening more often for competitors to target the top-producing advisors on the Street.
For an advisor producing $1 million in revenue, some firms are offering incentive bonuses up to $2 million.
"Over the years, bonus levels spike up and down," says Brian Curry, president of Burlington, Ont.-based Curry-Henry Group Inc., which specializes in advisor placement and recruiting. "But, right now, there are some serious dollars out there for the right type of advisor."
And competitors are more than willing to shell out a pretty penny to get the books of business that they want.
Marsh knows first-hand how these offers can affect a firm. Richardson GMP is in the process of acquiring Macquarie Private Wealth Inc., the Canadian wealth-management arm of Australia-based Macquarie Group Ltd.
"The banks are really aggressively throwing offers out there to entice the Macquarie advisors away from Richardson GMP," says Marsh. "Over the past 30 days, the cheques have gotten much more aggressive. And there are a lot of advisors left scratching their heads in disbelief on how much cash is being thrown their way."
Toronto-based CIBC Wood Gundy has already snagged two Macquarie advisors from Markham, Ont.; Raymond James Ltd., also based in Toronto, is in discussions with several other Macquarie advisors.
"An acquisition in the industry is certainly an opportunity for us," says Peter Kahnert, senior vice president, corporate communications and marketing for Raymond James. "While there will always be people who will move for the money, there are plenty of others who are looking beyond the dollar."
Kahnert would not confirm the level of recruitment bonuses Raymond James uses to entice new talent, but says it is competitive within the industry.
But can the independents remain competitive with the larger bank offers? Marsh says these offers often don't make sense economically, even for the larger firms. For an advisor producing $1 million annually (with a 50% payout), the recruiting firm is bringing in $500,000. After the costs of running the firm, Marsh says, a firm would average a profit margin of 10%-20% a year.
"So, after writing $2-million cheques, these firms aren't making money on these advisors for at least eight to 10 years," Marsh explains. "How much are the banks willing to spend in recruiting advisors [when the] result in back-and-forth movement is a zero-sum game? Do these costs of recruiting - with no real gain - really help clients?"
George Hartman, managing partner with Accretive Advisor Inc. in Toronto, refers to this strategy as "chequebook recruiting" and cautions advisors to look at every aspect before jumping at the dollar signs: the cheque doesn't come without strings attached.
Many of these signing bonuses are paid out in the form of a forgivable loan. If the advisor fulfils a certain set of mandates, repayment of the loan is waived. In order for the firm to protect its assets, it can demand that the advisor either remain with the firm for a certain period of time or hit specific revenue targets over the first couple of years.
Historically, the time frame for being locked in was five years, Marsh says, but those timelines have been extended to eight to 10 years so that firms can spread the financial hit to their balance sheet over a longer period of time.
"It's the only way," says Marsh, "these firms can make these aggressively priced deals make any sense financially on paper."
And this is the part of the contract about which Hartman cautions advisors: "They're going to have a financial obligation to a firm that could potentially be 10 years. So, [advisors] have to ask [themselves] if they are OK with that. Can they live under that obligation?"
Some Macquarie advisors may be second-guessing their decision to sign long-term contracts. Macquarie was known on the Street for publicly announcing every large book of business it nabbed from competitors, including Richardson GMP, which now owns the remainder of those recruiting contracts.
"It's a tough play for those advisors," says Curry, "because they latched onto a firm they thought would be a strong force in the Canadian marketplace, and it didn't work out that way for them."
Any advisor who wants to leave his or her firm before his or her contract is up is required to repay the outstanding loan amount.
The issue of recruiting bonuses hasn't stirred some feathers in just the Canadian financial services industry. In October, the Financial Industry Regulator Authority (FINRA) in the U.S. proposed a rule that would reveal an advisor's bonus to clients. If approved by regulators, advisors will be required to disclose their incentive bonus to any client who follows the advisor to the new firm within one year of the transition.
The amount to be declared would include any form of compensation, including signing bonuses, upfront or back-end bonuses, loans, accelerated payouts and transition assistance of US$100,000 or more, as well as to future payment that is contingent on performance criteria. (Currently, the proposal does not include retention bonuses.)
The Investment Industry Regulatory Organization of Canada (IIROC) is not looking at anything specific regarding the disclosure of advisors bonuses, but the Canadian regulator is monitoring FINRA's proposal closely.
"We will follow up with our FINRA colleagues," says Lucy Becker, vice president, public affairs, with IIROC, "to learn more about [this initiative] and to gain a better understanding of the issue and FINRA's objectives."
Marsh favours the implementation of a similar proposal in Canada; he says the industry needs to start putting the clients' interests first.
"We are entering an era of fiduciary responsibility - an era of managing conflicts, full disclosure and transparency," Marsh says. "I think it's only fair for clients to have full disclosure about what their advisors are being paid in cash to switch firms."
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