Earlier in 2023 we discussed how investment and mutual fund dealers misrepresent and overuse the term “independence”. As we share our thoughts and ideas with advisors, we like to choose themes and topics that get people talking. Our 2023 series is designed to be thought provoking, by coming up with new ways of looking at old conversations. Up next, we reflect on observations we’ve had while recruiting advisors in the last 18 months.
In the past 6 months, advisors have joined us from 10 different dealers. Despite the extremely challenging market conditions, we have found that our understanding of an advisor’s needs, and the commitments to our values and offering, is hitting a chord. While our competition, including investment dealers and mutual fund dealers, are backed by more financial power than ever before, and have more complex strategies than in the past, we have been able to successfully recruit, and we continue to learn more about the hidden mechanics of this industry.
In terms of small dealers being able to compete, some things need to change. We recently met with an advisor from a bank-owned dealer, and he was offered a $3 million cheque to move to another bank-owned dealer. He is unhappy at the bank, and he is seeking a dealer that can collaborate with him, help him with customizing his practice to be his own, and better control his clients’ experience. He acknowledges that happiness, and excitement for his future with Designed Wealth would be a significant improvement for both he and his clients. However, due to the significant financial incentive offered by the bank, he’s conflicted. We think a fair question to regulators is “how and why is this advisor, and hundreds of other advisors, put into this position”?
If regulators are focused on clients, and a fair marketplace (which hinges on those who are the client facing registrants) we have some thoughts for them to consider – not only to help keep advisors from being put into conflicting situations and protect clients from decisions for which they rarely partake, but to also ensure both small and large dealers are competing on level ground in a healthy dealer marketplace. 1. Should regulators ban recruitment bonuses because of the conflicts of interest? 2. Alternatively, if an advisor accepts a recruitment bonus, should it have to be disclosed to clients, and the client required to acknowledge in writing they are aware of the bonus? We do recognize that an advisor may face loss of income, and incur switching costs during any transition, and we aren’t suggesting that financial arrangements can’t be considered, however, bonus payments are so often unrelated to the needs an advisor has defined both for their, and their clients’ benefit.
One of the most inappropriate uses of recruitment bonus is when transition bonus payments to the advisor are contingent on the advisor liquidating existing client portfolio’s to support their new firm’s proprietary funds/products. While a proprietary firm’s business model is approved to be dealing with a branded product shelf, “buying” a book of business without an assessment as to whether the liquidation is in the client’s best interest seems contrary to regulation and the best interest of each investor. Liquidating a portfolio should be based on the merits of a client’s situation, not an advisor’s transition bonus. Further, there are many situations where the advisor is simultaneously giving up their registration, while still being paid by the new firm to meet with clients. So not only are the clients at the whim of the new firm’s pool of branded products, but the individual they followed to the new dealer, is now prohibited to undertake registerable activities; yet they are positioned as client facing. This situation sparks debate about where to draw the line when it comes to client confusion.
We have talked to advisors that have been offered eight figure bonuses to leave their current dealer. This type of dealer strategy is accelerating and if this type of incentive is allowed to continue, many small dealers won’t be around in 5 years. We’re fortunate to have found our niche with advisors, but other small and mid sized dealers who may have been competitive five or ten years ago, were simply not designed with business models that can compete in this environment.
These industry strategies are not new but are gaining momentum. Securities regulators have focused a lot of attention on improvements to dealing with clients, after all, clients are paying for professional service and advice. But if clients had a look under the hood, they may be surprised that regulations allow for their advisor to be so materially influenced without their knowledge or consent.