The U.S. Department of Labor’s fiduciary rule, designed to eliminate conflicts of interest by requiring all professionals who provide retirement investment advice to put their clients’ best interest before their own profits, will go into effect on April 10.
While the fiduciary rule may seem straightforward on the surface, it will have wide-ranging effects that will ripple across the wealth management industry, including financial adviser recruitment and compensation.
As a result of the DOL fiduciary rule going into effect this year (unless President-elect Trump's new DOL head reverses course), wealth management recruiting deals have changed dramatically.
The compensation levels that the wirehouses and other wealth management firms pay typically do not switch much year-to-year, but there have been recent developments with sign-on offers and deals due to the DOL’s fourth-quarter announcements and clarifications for their new set of rules and guidelines that involve financial advisers.
“They issued strong language on not using back-end bonuses that might encourage recently hired advisers to push clients too hard or inappropriately into new sales or revenue generating situations,” said Andy Tasnady, managing partner of Tasnady & Associates, a strategic consultancy specializing in compensation. “This has led to some suspensions and removal of back-end bonuses in new offers and a restructuring of deal calculation basis.”
The easiest way to summarize the new principles is to say, no assets and revenues derived from retirement accounts can be used to calculate back-end recruiting incentives, because the DOL has determined that poses a potential conflict of interest.
As a result, one of the Big 4 wirehouses has gone from a potential 340% [of annual gross revenue] deal to a 250% capped deal, according to Jeffrey Bischoff, the president and founder of Old Greenwich Consultants, a headhunter focused on the private wealth management sector.
“Yes, they are all still paying 150% up front for top teams, and even as high as 175%, but back-ends have shrunk, for now,” Bischoff said. “It is funny how fast the forces of capitalism can influence decisions around things like signing home-run hitters and the acquisition cost of top financial advisors.
“The recruiting wars inside the financial services industry have always had ebbs and flows, legal pronouncements and policy changes, and it always seems to come back to the laws of supply and demand,” he said. “Recruiting is picking up across all sectors and geographies in the wealth management business; 2017 is going to be a wild ride, buckle your seat belts.”
In the short run, the pending fiduciary rule has slowed new-hire activity – some big firms even suspended their deals for a bit while they reviewed the situation – and it also reduced the size of many potential deals, Tasnady said. However, the incoming Trump administration is a wild card.
“It is still being sorted out by the firms, and might still evolve again during the first quarter of this year depending on the new administration and what they might do to alter the DOL guidelines once in office after January 20th,” he said.
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