Seeking Alpha

UBS Pullback From Advisor Recruiting Marketplace Is A Non-Event

by: Mark Elzweig
Summary

The UBS advisor recruiting pullback has had no impact on the recruiting marketplace.

The advisor recruiting marketplace remains as fiercely competitive as before.

The fiduciary standard is starting to impact hiring practices.

Photo: Edward Dalmulder

What if a major wirehouse that was formerly the most aggressive recruiter on the block suddenly picked up its marbles and went home?

Suppose the other players kept shooting marbles anyway?

That's just what is happening. No one seems to care that UBS has left the circle. They are playing as aggressively as ever.

To review: Back in June, Tom Naratil, President of UBS Americas, announced with great fanfare that his firm was withdrawing from the "relentless recruiting" game and would henceforth focus on providing additional resources to its current advisor salesforce. Since then, UBS says it will boost advisor payouts starting in 2017, while chopping some of its deferred compensation programs. UBS later announced plans to bolster the ranks of product specialists, and would move them closer to the field.

Some observers asserted UBS's recruitment pullback was a function of sagging profitability. They were the most aggressive recruiters, offering as much as 175% in upfront money. Rivals pay a maximum of 150%. Perhaps, it would make more strategic sense to spread the love on the people in their own backyard.

In any event, no one else followed suit. In fact, competitors are seizing upon the UBS disengagement as an opportunity. Other wirehouses have intensified their own recruiting efforts, filling the hole left by UBS. Industry-wide, recruiting packages remain at stratospheric levels.

Meanwhile, the new fiduciary standard is pushing retail firms to focus more than ever on fee-based producers.

Major wirehouse and regional broker-dealers are backing away from smaller transactional producers and displaying a clear preference for larger fee-based advisors and teams. These trends were in place beforehand, but now they are accelerating. Major firms are not eager to add advisors to their ranks with whom they'll have to struggle to get up to speed with the new regulations. They already have plenty of those advisors. The new regulations begin to kick in April of 2017 with full implementation scheduled for January of 2018.

Uncertainty around the new rule has many wirehouse branch managers on edge. Adding to their concerns: They are expecting recruiting packages to change in January, although no one is clear what kinds of changes are in store.

Some branch managers expect that new hires will be required to have more of their book in fee-based business; others anticipate that criteria for back-end bonuses will change.

The Elzweig Deal Forecast

4/5 suns

The Elzweig Deal forecast is keeping its outlook at four suns out of five suns. We feel that margins at major firms are shrinking, forcing some firms to pull back from super-stratospheric offers to merely stratospheric. They are also uncertain just how much the DOL's fiduciary standard will cost to implement. Firms may find themselves with a little less to spend on new hires.

Spotlight on unvested deferred compensation: Wirehouses pay all or part of a recruited advisor's unvested deferred compensation. Monies are deposited in a deferred account that typically has the same investment menu as the firm's 401(k). Firm contributions vest anywhere from 5 to 10 years. Some firms address recruits' unvested deferred compensation on a case-by-case basis.

The back-end component of deals: This provision may be based on total assets or gross production, depending on the firm. For example, advisors may be required to bring over 85% of their assets the first year and 100% the second year, and 110% the third year. Gross production back ends could require 75% of onboard gross production by the end of the first year, 95% by the end of the second year, and 110% by the end of the third year.

Upfront

Total Package

Length of Contract

Wirehouses

100%-150%

200%-325%

9-10 years

High-End Boutiques

150%

200%-225%

9 years

Regionals

100%-150%

120%-340% packages

8-9 years

Independents

10%-60%

100% or more for special situations

3-10 years

Wirehouses: The gold standard for industry recruiting packages.

High-End Boutiques: Producers with $1 million-plus in fees and commissions or those on the fast track to get there. Both fee-based and transactional businesses are okay.

Regional Firms: Deals are getting richer as this sector guns for larger producers. Deals have been scaled back for career, $300,000 producers.

Independents: Major household name independent firms pay 10% to 60% upfront and may offer working capital loans and back-end bonuses to enhance their packages. Smaller independents typically pay 10% upfront bonuses and offer 10% working capital loans.

Super-Independents: Advisor teams with north of $300 million AUM can qualify for wirehouse-sized packages.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.