Even critics acknowledge that talent has started moving back out of the wirehouse and into independent channels. But you need the right tools if you hope to run with the bulls this year.
Another year of golden handcuffs keeping about 20,000 star advisors in the wirehouses is wearing away, which means it’s time to start talking about breakaway brokers again.
Advisors looking to break out of the wirehouse handcuffs can back up their dreams with the NCS report. Click image to download.
The good news is that if you signed a seven-year contract to stay at one of the four biggest brokerage firms when the market was melting down in 2008, more than half that term is done.
The bad news is that even those who want to roll the dice and break the contract can get into huge trouble if they break away the wrong way.
Compliance firm NCS didn’t want that to happen, so Rita Dew and her team have put together a white paper that lays out the dangers as well as the rewards of advisor independence.
Strangled on the firm’s “generosity”
Two years ago, six Citigroup brokers who quit ended up having to repay their firm $1.5 million in signing bonuses, leaving them deep in debt right when their new professional ventures needed start-up cash.
They argued that Citi could have fired them at any time and called in the loans, but the judge pointed out that since the brokers chose their moment to quit, they could just as easily have waited for the contractual deadlines to expire.
In practice, this might mean waiting a few more months before you strike out on your own to run out any contract terms.
Or it might simply be a matter of being honest with your current supervisor and negotiating a buyout of your current obligations. Nobody wants to work with a colleague who truly hates being where he or she is.
Of course, if you’ve accepted any form of retention bonus or compensation contingent on staying, you may find it harder to strike a deal at any price.
But every year, another chunk of the retention loans handed out in early 2009 are forgiven, shrinking the financial burden of leaving compared to what independent broker-dealers and RIA consolidators are willing to pay on signing.
Right now, the typical wirehouse star on a 40% grid probably owes the firm about 10 months’ payout.
That can be a lot of money, which is one reason Chip Roame at Tiburon says that while the amount of assets breaking away last year nearly doubled over 2011, close to 40% of it was actually shuffling back to the wirehouses.
The wirehouses still have the highest signing bonuses in the industry. The independent broker-dealers are catching up, but as far as I can tell the RIA roll-up firms like HighTower and Focus Financial aren’t quite there yet.
The broker protocol is not a universal shield
In the meantime, you need to know exactly what you will – and will not – be able to take with you when you go.
The NCS report provides a thorough checklist of what you’re allowed to bring with you and when you can get the process of requesting it underway without triggering suspicion, resentment or liability.
This can be crucial. A Connecticut district court served a newly independent broker with a restraining order forbidding him from contacting old clients after finding that he stole UBS “trade secrets” when he left.
Losing those files blocked him from rebuilding his legitimate book of business — again, at exactly the moment when he needed to start billing to support his fledgling firm.
He could easily have taken exactly the files UBS would let him take under the terms of the broker recruiting protocol. But he apparently left with a lot more than that, and in the process he ended up with access to none of the files at all.
Naturally, all of this could have been prevented if he had taken steps to stay on his former firm’s good graces.
That might involve negotiating with your superiors to determine exactly how they would interpret the broker protocol in your case, or even making plans to sign the protocol yourself once you’re out in order to maximize your safe harbor coverage.
In any event, it’s probably best to avoid doing anything as drastic as setting up a new RIA or formally starting work with another brokerage firm as long as you’re still working for your current boss, the NCS team says.
You can dream all you like, but pushing the button may be considered engaging in outside business activity, while double registration is not looked on favorably in some states.
Patience is everything
It can take a few months just to get a broker-dealer to file a U5 resignation notice with FINRA and for any necessary new registrations to work their way through the system.
While that’s going on, every advisor in transition needs to pay the bills – especially if those bills are expanding to pay for a new office, technology, marketing materials, staff and professional support.
At a minimum, come up with a firm budget for start-up costs and secure access to at least a year’s operating and household costs. NCS points out that business loans may help bridge any gaps.
They’ve come up with a great checklist and any advisor who follows the steps can reap the rewards of independence.
It might mean patience, planning and, when necessary, professional help, but that’s probably what you’d tell your own clients, right?
