In the major sports world, we see elite athletes sign multi-million dollar contracts to move from one city to another all the time. In the past decade, we’ve seen contracts to superstar baseball players like Alex Rodriguez and Albert Pujols get paid over $250 million dollars to sign a long term contract. When financial advisors decide to move from one brokerage house to another, many clients aren’t aware that cash may have exchanged hands to get the broker to make the move. The financial advisor business isn’t much different than major sports. Banks, brokerage, and financial advisory firms alike are looking for the upper echelon of talent, and will pay large sums of money to get players to change teams. So, how does this all work?
Let’s use the brokerage world as an example. If your financial advisor or broker works for a UBS, Morgan Stanley, Ameriprise Financial, Merrill Lynch, or any of the main brokerage houses, they are being wooed all the time to leave for a large sum of cash. In the financial advisory business, your worth on the street is based upon the revenue you produce and the amount of assets you have under management. A broker who does $500,000 of revenue and has $50,000,000 of assets under management can be offered anywhere from 2x to 3x revenue in a lump sum of cash in order to be able to make the move.
If a financial advisor switches from one firm to another, they will typically sign a promissory note in length anywhere from 7 years to 10 years when they move to a new firm. These notes will be filled with hurdles on how many assets they will move from their old firm along with how much revenue they need to produce. Some of the contracts will allow for additional bonuses if certain hurdles are hit over several years after the move. Here’s the main problem. The clients have no idea of the amount of cash that exchanges hands in one of these moves. Generally they are told by their broker that the move is being made due to better investment management, technology, management, or whatever excuses are told to the clients to sign the paperwork to move their accounts.
Our industry is filled with confusion for consumer on how brokers actually get paid. The lack of disclosure over broker bonuses is one of the big gaps that need to get fixed to help give the consumer more information on why their broker is making the change. Everyone is entitled to make a career move, but if you are getting paid a million dollars to make a move, shouldn’t the clients have access to this information so they can understand exactly why they are moving? In fact, many of these companies have VIP tours where they whisk brokers in and give them the full meal deal recruiting tour chomping at the bit to get them to move their book and sell products of the new company.
The next time your financial advisor says they are going to make a move, ask them these simple questions:
- Did you get a lump sum check to move?
- Are there extra incentives or bonuses to offer certain types of products or services?
- How long of a contract did you sign with the new firm?
- Is it going to cost me anything to move my accounts?
Ultimately, you can choose to stay with your broker, stay with the current firm you are working with, or take your money and manage it yourself. If you ask the right questions, you’ll be able to get a better sense of the motivations going on when your financial advisor makes a change from one firm to another firm. It may be all the information you need to determine if the move is right for you.
Written by:
CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Editor in Chief of Your Smart Money Moves
Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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