Any financial advisor with a decent book of business has gotten the call before: a recruiter from a rival firm is offering big upfront money to change teams.
Such signing bonuses, however, are usually made in the form of a forgivable loan. While many have taken the money without consequence, some departing advisors earn more trouble than the payment is worth. If you do decide to chase the money, heed this advice: Put it in the bank.
The competition to hire financial advisors has intensified as firms such as Morgan Stanley, Bank of America Merrill Lynch, UBS and Wells Fargo have invested in their wealth management divisions to compensate for falling revenue from units like investment banking and equities. For superstars, some firms are paying advisors an upfront payment worth 125% of the revenue they generated during the last 12 months, said Paul Werlin president of Human Capital Resources, a Florida-based financial services recruiting firm.
Even smaller producers are being lured with such payments. One young financial advisor who Werlin recently spoke with was paid $150,000 upfront to switch firms, even though he generated just $300,000 during his last 12 months of work. “We’re seeing deals and money that we have never seen before,” said Werlin. “It’s never been as competitive for bottom-end players.”
Wells Fargo declined to comment on its financial advisor hiring strategy and Morgan Stanley and UBS didn’t respond to requests for comment. “We have made a strategic decision to focus on supporting and developing our existing advisors, to hire new trainees, and to be highly selective in recruiting and hiring,” a Bank of America spokesperson told eFC.
Firms Want Money Back
Signing bonuses as a form of recruitment, however, come with many strings. A forgivable loan is an upfront payment that doesn’t have to be repaid if a financial advisor stays with the firm for the duration of the loan – usually between six months and two years -- and hits certain revenue thresholds. But if an advisor quits or gets fired before the term ends, or fails to meet revenue targets, the firm and its team of lawyers will often come storming after the money.
With deals being offered to smaller, less proven producers, and the industry becoming more volatile, defaults on the upfront payments are skyrocketing, said one Merrill Lynch advisor who’s seen several former colleagues forced to declare bankruptcy failing to live up to terms of a signing bonus. In 2010, roughly 25% of financial advisors facing disciplinary hearings before the Certified Financial Planning Board of Standards had filed for bankruptcy. In 2011, that number jumped to roughly one-third, according to RJ & Makay.
“Financial advisors have been clobbered over the last few years” with the market turndown, said Kevin Carreno, chief legal officer at International Assets Advisory, a broker dealer and Securities and Exchange Commission registered investment advisor. “The ones who jump ship often need a quick fix, and they rarely put the money in the bank,” Carreno said.
Severe market fluctuations, like those in 2008 and 2009, can cut deeply cut into an advisor’s book of business in short time, leaving them with little hope of hitting revenue targets before the loan is due. If a financial advisor defaults on a forgivable loan, or quits before the term ends, they are required to pay back the balance plus interest.
“Firms have become incredibly aggressive in getting the money back as soon as possible,” said Patrick Burns, a California-based attorney who specializes in the securities industry.
If a departing financial advisor can’t pay the full amount due, they can take their case in front of an arbitration panel to try and agree on a lesser amount. Losing the case leaves the advisor liable not only for the remaining loan due, but attorney’s fees of both parties, said Burns. About one out of every 100 defaults result in a lesser amount due, said Carreno.
In a 2010 case, six former Citigroup brokers sued the firm, claiming they shouldn’t be responsible for paying the remaining balance on their signing-bonus loans totaling $1.51 million, according to Bloomberg. The chief plaintiff, Thomas Banus, said he left because he was unhappy with how Citigroup ran its business.
“Having left the firm without repaying everything they owed, they brought this baseless lawsuit in what quite plainly was a studied effort to prevent collection of the debts they owed through the arbitration process,” U.S. District Judge Lewis A. Kaplan noted while siding with Citigroup.
Without payment, FINRA can suspend an FAs license after just 30 days. The only real option at that point is to claim bankruptcy, information that is publicly available to investors and other firms. Brokerage houses can then begin laying claim to personal assets.
But perhaps the worst part? Uncle Sam. A forgivable loan is considered taxable income. If a financial advisor receives a bulk payment of $2 million, he could owe state and federal taxes of roughly $750,000, at the end of the year, depending on their tax bracket, Burns explains in a white paper on forgivable loans.
“If they wanted to leave the next day, they might owe the wirehouse the full amount, $2 million, yet they only netted perhaps half of that” due to the tax charge, Burns wrote.
All of this adds up to two simple lessons for financial advisors: Think before you jump ship for a big signing bonus. And, if you take the money, put it in the bank.
You never know when you may need to pay your new employer back.