Bull Market in Recruiting Bonuses Coming to an End
[Editor’s Note: It’s no surprise when a recruiter argues that the time to move is “now” and that the market top has been hit on recruiting bonuses. But we found some interesting twists on the arguments here, and hope it provokes some debate.]
Just as the market for China investments proved to be wildly overheated, so too is the market for recruiting top financial advisors.
Financial advisors’ practices have had extraordinary growth and the valuations paid by banks have reached epic proportions. A correction seems imminent.
Since the lows of 2008, the U.S. markets are up close to 150% even with the latest downtrend, and the corresponding assets and production of advisors’ businesses have multiplied almost in lockstep. Financial advisors and their parent banks are reaping the benefits of the erosion of Glass-Steagall prohibitions, creating more cross-selling opportunities, from core asset management services to life insurance and lending.
Most everything has worked in advisors’ favor. Core fee-based revenue has boomed, while transaction revenue has held its own due to alternative investments, structured notes and general trading. Net new assets have grown tremendously thanks to booms in everything from technology to real estate. Advisors in the last few years have benefited from one of the greatest bull markets ever in fixed income and equities, and there has been an explosion of loan and insurance revenue.
Valuations of advisors’ practices have grown accordingly, reflecting firms’ insatiable appetite for revenue producers and desperation over natural attrition. The old hiring bonus norm of 100% trailing-12 production with some backend kickers has been replaced in some cases with bonuses of 200% just for walking in the door and upwards of 400% with realistic backend kickers. Firms are paying higher and higher prices just to maintain the status quo.
Just when the saturation point appears to have been met in the wirehouse battles, new supply has sustained the feeding frenzy as a result of the talented brokers let loose by the exists of Credit Suisse, Barclays and Deutsche Bank from the U.S. market.
But valuations cannot go up forever, and most importantly, the end buyer must always make a reasonable ROI. Based on any logical math, the prices recently paid do not make rational sense and several high-level banking sources suggest that the bidding war is over. In fact, their expectation is that there will be a flood of advisors coming onto the market with so many seven-year deals coming off lockup.
Making matters worse for advisors, trailing-12 month production is falling. The market has been in correction mode since the summer of 2015 and the recent contraction has been particularly severe.
Asset and revenue growth was flat to down at most banks and brokerage firms in 2015. Production levels in 2016 will no doubt be worse. Typically, client sales during market corrections boost advisor production, but it is temporary. We are not likely to see clients return to the markets aggressively, leading to further production declines. IPO’s and M&A transactions are down, the fixed income markets are still in distress and structured notes and other alternatives are slow, as is general trading revenue. Needless to say, equity markets across a wide range of sectors have been clobbered this year.
The Perfect Storm is here, dear broker. With T-12’s hitting a peak, the prices paid by banks have crescendoed. What’s more, the impending flood of older advisors selling their books isn’t going to help.
Roger Gershman is a managing director for Consultants Period, a recruiting firm. He is also is Founder and CEO of WealthGuard Inc., a company that evaluates financial advisors on behalf of investors. He previously worked as an advisor for 25 years at firms such as Hambrecht & Quist, UBS and was a director of private banking at Credit Suisse.