How Firms Use Retiring FAs to Reward Themselves and Lower Comp Costs

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A reckoning over how U.S. financial advisors are paid is fast approaching.

The industry is heading toward a European/private banking pay model that replaces production-based compensation with a salary-bonus-sometimes commission. The change will be fueled by an aging broker workforce, clumsy models of retirement and succession planning, disputes over book valuations, a growing indie movement and fewer and less rigorous training programs.

For advisors, the change will mean a much lower overall payout.

At around the age of 45, advisors typically focus on building their own teams with an end toward monetizing their businesses. It’s beneficial not just for themselves and their families but for their teammates and clients as well.

Given that the majority of advisors today are 55 or older, time is running out to arrange for a successful transition into retirement or independence. But it is a struggle for advisors to calculate a price for what their books are worth. They relentlessly wrestle, too, with the benefits, costs and consequences for themselves, teammates and clients of breaking away or retiring.

It is not just age that is driving the move to independence. The RIA (registered investment adviser) space is the fastest growing segment of our industry, with growth of independent brokers and hybrids (dual broker and RIA practices) close behind.

AdvisorHub readers alone have moved over $30 billion of client assets to RIA practices in the past few years, according to our surveys. Anecdotal evidence indicates that assets grow exponentially as traditional brokers establish themselves in independent practices.

Independence offers not only the lure of revenue growth for those with an entrepreneurial spirit but a path to monetization. Succession planning in the indie space is much more customizable, in my opinion. Wirehouses have a formulaic approach to retirement that gives the retiring advisor a continuing payout over five or so years, with funding provided by teammates who must agree to accept a lower payout on the retiring broker’s customers.

The facts of each practice are different, of course, but there are reasons why older brokers choose the often-easier course of taking a  “sunsetting” agreement at an existing firm rather than cashing out by taking a check to jump to another big brokerage. Moving a practice or setting up as an independent is hard work, the benefits of a bespoke retirement plan notwithstanding.

Less arguable is that teammates who move with a lead advisor to a new firm that calls the team shots are rarely in a good position. When the lead member retires, the team is up against the new firm’s rigid inheritance rules.

With the help of complex legal documents, firms go to great lengths to claim dominion over a retiring advisor’s assets, giving junior team members little flexibility in moving or negotiating better deals. Firms lock up the clients in their arrangements with the retiring lead advisor, and often put a limit on how much commission an inheriting broker can receive on the accounts.

Firms also continue to half-heartedly fund once-robust training programs, which typically have an 80% washout rate, for the same selfish reasons. They want to seed their most successful teams with inexpensive youngbloods. Few of them will earn as much as old-time advisors but their client assets are more likely to bind to the firm than to the individual team members.

Which returns me to my first point. Inheriting brokers are moving much closer  to the European/private banking model of their employers’ dreams than to the old-style production-based payouts. The firm keeps 70-80% of gross production. And as more retiring brokers take such internal deals, big firms will soon have a lock on a significant portion of advisor assets.


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Tony Sirianni
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