Intro

Unknown: the great news for advisers is the opportunity is is great it’s still going to be great I don’t see that changing in the near future the competitiveness and the drive to to recruit the drive to bring advisors to your firm it continues to change that that the marketplace of what advisers can achieve in 25 years we’ve seen wirehouse deals going from you know barely 100% of T12 to now upwards of 400% of T12 uh and that 400% might be a new number for people as they’ve not heard that cuz 300% had largely been the headline number but we’re absolutely seeing deals at 400% but what we’re seeing is firms need to be profitable as they are looking at structuring these deals I just think there’s a constant arms race in between broker dealers and Ras out there in the industry right now one industry leader will up the ante the other firms are are almost forced to to to follow suit much like the custodians kind of race to zero continuing to to lower fees and lower ticket charges kind of the opposite on the broker dealer side it seems like every single New Deal we’re getting surprised by a new number that’s that’s beating the last one the larger firms you know when they lose an advisor and they have another one that comes in in a similar profile they don’t want to lose two in a row you know and so there there’s some gamesmanship that is happening within the deals as well uh and and again with new entrance it just creates more and more competitions and there’s a lot of times with advisor that we think should be getting a top tier deal and they come back with a second or third tier deal and we end up scratching our head we have to to look at why that firm and that if the firm is coming in with not with subpar economics and their value proposition is mediocre then it’s a pivot right we 86 that firm and move on to someone else do you think we’re at the peak of upfront economics

Podcast Opening + Introductions

Corey: hey everyone thank you so much for joining the podcast today as most people know I’m sure through emails Publications phone calls to your office upfront deals for financial advisers to make move from one firm to another right now are at an all-time high and it’s been a significant change on a almost on a monthly basis we’re hearing of firms consistently upping the ante to incentivize financial advisers to move to their firm and while an upfront offer should never be the sole reason for a financial advisor to move firms or to choose one firm over another it’s a large part of the decision-making process and we just wanted to discuss with you today what the environment looks like why deals are so high and where we expect it to go from here and I decided to bring on the CEO of bridgemark Jeff Nash between us both we’ve helped over a thousand financial advisers make a move from one place to another and we’re constantly helping advisers in the environment and uh Jee I really appreciate you coming on to talk about what you’re seeing out there

Jeff: appreciate it Corey thanks thanks for having me

Current Deal Environment

Corey: yeah absolutely so Jee as I mentioned I mean we helping financial advisers get these types of offers all the time out there what does the environment out there look like to you right now

Jeff: you know I’ve been doing this for 25 years now in some shape or form uh initially working for companies specifically LPL and and now working with bridgemark and for bridgemark and working for the advisers themselves for the last 11 years and and it’s funny it seems like every year we’re saying the same thing deals have peaked and yet every year they seem to go higher and higher the competitiveness and the drive to to recruit the drive to bring advisors to your firm it continues to change that that the marketplace and what advisers can achieve you know I think there’s there’s I think it’s honestly going to continue but what we’re seeing is firms need to be profitable as they are looking at structuring these deals right and so there’s a lot of you know what I would call kind of footnotes in there or asterisks um you know and and so for example what we’ in 25 years we’ve seen wirehouse deals going from you know barely 100% of T12 to now upwards of 400% of T12 uh and that 400% might be a new number for people as theyve not heard that because 300% had largely been the headline number but we’re absolutely seeing deals at 400% but the also the length of time on those deals had gone from three years to 10 years to now they’re we’re seeing some at 12 and even up to 15 years on deals uh and so while the headline number is is phenomenal right they’re stretching it out to keep their keep advisors around for profitability uh knowing that they’ve got these advisors locked in knowing that they’ve got the clients locked in right and they’re going to get their profitability in some way shape or form you know so what so really what we’re seeing in the marketplace and I’ll let you kind of weigh in on it as well because you’re seeing a lot of this as well you know at bridgemark we’re going to move over a hundred teams a year and we’re going to move them to as many as 25 different firms in any given year uh and that number is going to change year in year out as far as which firms win the win the business so we have a really clear picture of where what advisors are getting and what firms are offering as we’re working with them really closely to understand the marketplace and and the numbers just every it seems like every single New Deal we’re getting surprised by a new number that’s that’s beating the last one

Why Deals Are Rising

Corey: yeah I mean I just think there’s a constant arms race in between broker dealers and Ras out there in the industry right now one industry leader will up the ante and the other firms are are almost forced to to to follow suit much like the custodians kind of race to zero continuing to to lower fees and lower ticket charges until you know it’s you know the the the the race to zero it’s kind of the opposite on the broker dealer side where financi where different broker dealers one will raise up to 100% of trailing 12 production and some of the others have to follow suit to remain competitive

Jeff: yeah and they’re making they’re increasing backend Awards you know and we’re seeing new firms that historically was really staunch against giving you know a smaller amount of money or even no money at all as we look at the raia space uh they’re all coming to the table with now ways to give money you know I’ve seen small firms smaller Raa firms looking at financing options for themselves so they can give out money to advisers to win recruiting Wars uh we’re seeing firms you know the larger firms you know when they lose an advisor and they have another one that comes in in a similar profile they don’t want to lose two in a row you know and so there there’s some gamesmanship that is happening within the deals as well uh and and again with new entrance it just creates more and more competition you know the the end game of some of this stuff is where does it end right what’s what we’re in the middle of right now is what’s going to be a a pretty significant consolidation in the industry and that consolidation firms don’t want to be left out right and so that’s what they’re trying to do is capture ADV visors capture as much market share as they can so that they’re one of the surviving thrivers in the industry and that’s being driven by growth and recruiting uh and if they’re not growing they are dying it’s an age-old expression for any industry and it’s really never been more true here

Other Drivers

Corey: yeah for sure I mean my next question was going to be you know why are deals so high what’s driving these these deals to go up and I I think we already covered there’s just an immense amount of competition out there and in order to stay relevant you know multiple decades into the future they need to have size and scale they need to be winning the recruiting Wars um there’s also a lot of other things that help you know markets are at an all-time high right now I mean since 200 N we’ve been in a one of the biggest bull markets ever obviously that helps firms have a lot more cash to potentially deploy to attract financial advisers to their firms um higher interest rates are extremely profitable for brok dealers you’re seeing a lot in the headlines right now about um the spreads in cash sweeps which is what firms are getting as an interest rate on their cash versus what they’re deploying to the actual clients of those firms those spreads are pretty significant and it’s pretty profitable and as interest rates have been rising that’s something that is extremely beneficial uh from a broker dealer from a profitability standpoint so once again much more cash to deploy Jeff did did you want to talk about the the emergence of private Equity inside of the broker dealer space as well I think that’s just another huge driver

Private Equity

Jeff: yeah I mean so what’s happening in this industry is the profit margin the the tradition the historical growth rate and the consolidation trend is driving enormous amount of outside investment right so real to be really specific profit margin you know the broker dealers are are making profit margin but it’s a grow margin and the stock market continues to grow year and year out and if you look into the future for the next 10 years while you may see down years the expectation is the markets will be higher and if the markets are higher then assets grow and if assets grow then Revenue grows and so it’s somewhat of a formulaic approach to this industry add to that consolidation of of firms and advisors right with the retiring advisor base and you have more profitability per advisor and that’s what’s driving a lot of private Equity investment into this industry they see this as near term right three to five year window which is what private Equity typically looks at as a three to five year window to just get their money in grow the company and get it out uh and that investment in companies in these broker dealers in these raas is exactly what they’re looking at for the next three to five years realistically I think it’s going to be longer I think it’s a 10-e cycle that we’re in the middle of and and what happens after that you know no one has a crystal ball clearly but I think we’re in the middle of a 10-year growth cycle and consolidation cycle that we’re going to see a lot of opport Unity right for a lot of folks in this industry and a lot of money being plump you kind of put into this industry that’s going to drive valuations and drive recruiting deals the interesting thing is you brought up cash sweeps right and so when we think about cash sweeps it’s one of those areas that is actually currently getting scrutiny there have been some proposed class action lawsuits that people aren’t getting enough money on cash sweeps and that is one of the things if we look think about Tailwinds versus headwinds right the Tailwinds what I just described with PE the headwinds on cash sweeps is something that we might need to consider because that could be a headwind that may affect deals right as they are incredibly profitable upwards of 50% of a firm’s EA right 50% or more of a broker dealer or Ra’s profit could be tied or custodian’s profit could be tied back to cash sweeps right if that money if that number shrinks that’s a huge hit on profitability and that could be a real headwind on transition money right so so while there are tons of Tailwinds there’s always some headwinds out there as well that we’re going to be looking out for

Potential Threat of lower interest rates

Corey: yeah I mean and it’s not just the Potential Threat of lower interest rates I you know the FED has mentioned a few times potentially lowering interest rates but also you know some of the lawsuits that are out there right now pretty much every large firm in the industry right now is in some sort of lawsuit to potentially you know lower that spread like you were talking about so it’s kind of a you know a multiple Direction headwind um not just one

Jeff: yeah no question and that’s going to right so when we think about what happens to Deals right while deals continue to go up and they continue to get higher it’s not always a straight line right there’s individual fluctuations that can happen in there you know I I would even compare it back to like an ibbitson chart you know where over the long term of it ibbitson chart if you look at where it starts and you look at where it ends clearly it’s a significant higher but as we all know in the ibbitson charts there are individual Peaks and valleys in there uh and I think that’s what’s happening with deals as well and and it’s it can be firm by firm it could be advisor by advisor right we always are working with advisors and there’s a lot of times with advisor that we think should be getting a top tier deal and they come back with a second or third tier deal and we end up scratching our head right and so what do we do on those right and you and I know what we do right but for the advisers listening what we’re doing on those is we’re we’re working with the firms to understand why we’re working with the firms to help them get a top tier deal and if not and if it comes down to why that firm versus another we will obviously have multiple firms in the fold and as you said in the beginning it’s not always about economics right we have to look at why that firm and that if the firm is coming in with not with subpar economics and their value proposition is mediocre then it’s a pivot right we 86 that firm and move on to someone else

Are We at the Peak of Upfront Economics

Jeff: so so Jee just just just talking about you know what you were just mentioning I mean do you think we’re at the peak of upfront economics or do you to advisers or do you do you expect them to potentially go higher and we might have differing thoughts on this which is okay yeah which is great because we haven’t talked about it in a while um so the way I think about it is I think the it it’s really going to come down to um quality of advisor is really where I see that I see that and by the way I see that also in the m&a space uh I see buyers in the m&a space and the same same thing in broker dealers and this is where I think it’s going to be for high quality someone that they really the adviser has a great business they’re gonna I think recruiting deals are may even start looking at historical growth rates of the advisor what are they bringing in in net new assets right so it’s not just the quality of the existing book of business but if they’re going to keep this adviser around for 10 years and they’re overpaying what have they brought in in the last couple of years are they growing or are they flatlined and so I think and this is the same thing that has already been happening in the m&a space I think what’s going to be happening in recruiting deals is bigger deals are going to be able to be had right some of it will come back to packaging of the advisor some will come back to right so how do you package the adviser quality team you know say similar characteristics that we look at in the m&a side having Junior advisors have a having a planning approach having fee based assets under management having a growth rate that’s you know above average as we start thinking about recruiting deals I think we’re going to continue to see more agressive recruiting deals for better quality advisor teams uh and I think for the Lesser ones I think we actually may see some some flatlining and potentially even some dropping off on that

Deal Structure Changes

Corey: yeah I mean I’ve noticed specifically I haven’t seen any deals coming down but I have seen firms be a little bit more conservative in the way that they’re structuring their deals especially to fin financial advisers that are at more of a maybe a captive firm or maybe historically bring less assets than an independent dep to Independent move which is almost always 100% of their assets transitioning from from firm to firm so a couple things that I’ve been seeing in in some offer letters recently you know some of these deals 100% maybe even 120% of trailing 12 production but at the six-month Mark if you don’t bring 70% of your assets or 80% of your assets some of that money is clawed back that’s something that is pretty unique that I haven’t really seen in deals in a really really long time or if a financial advisor um signs a an eight-year deal to move over to a firm if they’re a million-dollar producer and they don’t hit $700,000 of trailing 12 Revenue basically their forgiveness doesn’t start until they hit that threshold so if it takes you three years to get back to that 700,000 that 8-year note potentially turns into an 11-year note so I’ve seen some things on the back end for broker dealers from advisers at certain firms just to cover the you know the huge amount of capital that they are deploying out there so I have noticed that

More Protection for Firms

Jeff: yeah I mean again when you skip the more money you give the more you got to protect that money that you’re giving to make sure it’s better quality um like I said I think that’s going to continue to happen I do think deals will continue to get more competitive I think they’re going to go higher um I’m seeing still individual deals hitting new records and yet I still see other deals that are coming in at kind of medium levels you know similar to what would be even a couple of years ago um so I think individually we’re going to continue to see larger deals uh as the co the cost and the competition continues to increase but firms are going to continue to look for ways to protect themselves so they’re not writing bad deals and they’re going to be profitable in those and so what you’re talking about is really a way of protecting the firm and we’re going to continue to see more of that you know again there’s the great news for advisers is the opportunity is is great it’s still going to be great I don’t see that changing in the near future right what’s the near future the next several years we went through a period of time where interest rates went from a reasonable number down to zero and we still saw huge deals we’ve now gone from a period of time with and and the huge deals we saw then haven’t dramatically changed to where they are now where they were at where interest rates where fed funds are over 5% right so we we’re still seeing large deals whether the are as profitable on cash or not uh you know but where it really comes down to making sure that they’re writing on the individual scenario that that firm likes that scenario the one thing I would say about that which I think is really important is each individual broker dealer that might be giving a deal they’re going to view what is a quality scenario differently uh and so that’s something that’s really important right of course you and I deal with this every single day but different firms value things different differently when they’re looking at deals which is why sometimes when we are talking to two or three firms that are all very competitive on an average basis one of the firms will be great the other one might be medium and the third one might not be good at all and a on on a different advisor they’ll be flip flopping in position right so it’s not just the deal itself it’s the deal and the firm and that cross-section

Maximizing Economics by Fit

Corey: yeah I mean I definitely think that’s you a place that we could help us seeing these deals every single day once again economics not being the most important decision maker in the process but you know us understanding your business understanding the makeup we understand where it’s attractive and where it’s not so you know holding all other things constant we can help you maximize those economics so one thing I wanted to cover on the call today is there are some firms out there where you just aligning with the right firm economics can be significantly higher so one huge change that I’ve been seeing in the industry over the last couple years is firms moving from doing their underwriting on a trailing 12 Revenue basis and giving you a percentage of that and just giving a little bit more thought on the actual assets under management that you have so for certain financial advisers there’s a real way to maximize uh the The Upfront money that they could potentially get out there and I’ll give an example I have a financial advisor right now he’s doing a million dollars in trailing 12 production he has quite a bit of brokerage business he has Bel low Roa so he’s doing a million dollars trailing 12 Revenue $180 million in total assets under management and the firms that are still underwriting on trailing 12 Revenue are coming in almost 50% lower than some of the firms that are off of assets under management so we found a perfect firm for this advisor off a million dollars in trailing 12 Revenue upfront this advisor is getting $1.8 million um which if you consider that in trailing 12 Revenue that’s 180% deal to make a move to the independent Channel which is almost unheard of um but we’re seeing more and more every day advisors with more assets it’s just one specific area where we could help advisors find the right firm to maximize the economic impact for them I assume since you’re saying he’s independent that scenario he’s also at a 90 plus percent payout and and all of that as well full ownership and everything correct

Jeff: yeah yeah

Feel, Fit, and Financials

Jeff: you know it’s uh I can’t help myself here and you know where I’m going to go with this also Corey right at bridgemark we talk about the you know feel fit and financials and and when you’re looking at firms it’s our belief and our experience that you really want to consider the firm feel right the culture of the firm and make sure it’s philosophically and culturally aligned with you your business and your business goals uh and that really is the most important part of that decision and then the fit is the business itself and make sure that the technology and the tools and the products and the resource resources and the things that your clients are going to need really match and and then of course there’s the financials uh and while today we’re talking all about financials it’s I would can’t help myself to make sure everyone recognizes financials is really important it’s onethird leg of that three-legged stool uh but that three-legged stool has two other that equally or even more important legs with feel and fit uh and so that’s you know when you’re looking at firms and and when we are helping you look at firms we really are helping you through all three of those F phases of that

Service-Focused Firms Catching Up

Corey: for sure for sure and Jeff one other thing that I just wanted to mention I think you know some independent broker dealers maybe two years ago were all part of that arms race that we were talking about but there were some really really high quality firms out there that are just really known for customer service really known for having awesome home office staff constantly winning awards that they didn’t really play in that they said listen if you want to make the move over to our firm you’re joining for the customer service you’re joining for the community you’re joining for things other than upfront money and there’s quite a few of those firms out there I would tell you was having a conversation with an adviser the other day he was looking at um a larger independent firm and a smaller firm um and he wound up a couple years ago choosing the larger firm because it was about 60% of his trailing 12 Revenue more to make the move over there wound up making Mak a huge mistake and I told this adviser you know even those smaller firms now are starting to get really close in upfront economics so it’s not really making that decision of you know topnotch customer service versus upfront economics you can it’s all really comparable now so you could you know really make a smart decision and still make it a profitable move for yourself

Competitive, Not Always Top of Table

Jeff: yeah no question I mean it’s it that it really is an arms race and and firms don’t want to be left behind is really what’s happening and they understand that the economics are critical in that decision- making they also understand that not everybody’s evaluating the full full eff of feel fit in financials right and financials when they’re not working with bridgemark which we understand is a lot of people uh there’s a lot of people who overweight financials and if they’re not going to even be in the ballpark then they’re going to lose out so it’s forced them to re-evaluate their offering to at least be comp comptitive they don’t need to be top of the table uh and in many cases they don’t even need to match but they need to be close enough to make it so they can get to the final stages and win those advisors and that is that ultimately is working to the advisor’s benefits right because it’s giving them more choices with a more competitive economic comparative offering and that’s exactly what is better for for advisers in general

Negotiation Closing the Gap

Corey: yeah and most of the time as well if we get down to it and it’s between a firm with significantly higher upfront economic at versus a firm that is just like a fantastic philosophical fit for them most of the time we can negotiate with that firm as we know the needles that could be moved just doing this so many times to get you as close as possible to closing that Gap if not most of the time closing the Gap completely to help you make the you know the the true best decision for you and your clients

Why Consultants Help Negotiations

Jeff: yeah it’s a great point I mean it’s an interesting business that that happens here there is no public information on this right it’s not real estate where you have you know transaction history and Zillow talking about the transactions of the recent prices and you have comps on recent homes that have sold in your neighborhood there is no public information on this and and we have effectively become that public information market for advisers uh because we’re just doing so much work with so many advisers in a given year uh so so we really are helping advisors a lot in in those negotiations there’s no question

Wrap-up + Headline Numbers Warning

Corey: yeah I I I I totally agree um Jee is there is there anything else that that that you want to add

Jeff: you know I think if there’s one other thing I would add I would say um watch out for headline numbers um I think that’s the one last area that we’re seeing a lot is there are headline numbers that are out there and I’ll even go back to one I used earlier 400% uh is the headline number the real number when the wirehouses and this is goes back you know certainly over 10 years ago probably even 15 years ago when they first went to 300% deals uh and those first iterations of 300% deals it was fewer than 10% of advisers that were actually receiving achieving the growth goals to receive the full 300% so while the headline number might have been 300% in reality advisers were only getting you know 150 or 200% uh because of of some of the goals that had to be achieved to get the full payout and so I think the biggest thing I would say is there is a headline number that’s out there for everyone and a lot of folks are putting out really high headline numbers and then there can be iterations to that those could be considered clawback Provisions those could be considered growth goals right there’s a lot of other factors that can come into that number those could be just operating expenses you know payout rates and and you know if the cost of doing business once you get there is a lot higher then the headline number you’re just borrowing your own money is effectively what you’re doing you know so really be careful and aware of there’s a headline number which sounds great and looks great but there’s a lot more economic you know numbers inside of those deals that may that should also be considered

Outro

Corey: yeah for sure and the only other thing that I would add is you know a lot of advisers they’ll they’ll reach out to me and they say Corey I’m not ready to make a move but I am curious about this I feel like I’m wasting your time and that’s 100% what we’re here for if you just have any questions at all in terms of what the outside world looks like or economics look like you can have a broad stroke conversation with us to help understand what those things look like without you being on the radar at seven different firms and you going at this by yourself so if you have any questions please feel free to reach out either me or Jeff just to have a confidential conversation and if it doesn’t go anywhere after that totally fine but regardless of where you are in this process we could add a ton of value just doing this all day every day so Jeff I really appreciate you hopping on the the podcast today and if you have any questions at all please feel free to reach out to us hope you have a great day bye all

Unknown: [Music]