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Deal or no Deal? Your Next Broker/Dealer Offer Awaits You

The television show Deal or No Deal became a big hit in 2005 with 26 numbered boxes paired with 26 models poised to reveal the contestant’s “deal” to the world. It was a show that involved little to no intellectual capital to win. Choose one box and decide how stubborn or greedy you wanted to be. Keep your number and hope it contained the 1 million dollar prize or choose a deal from a “broker” in the dark upstairs office that make an offer based loosely on the remaining odds.

Negotiating your next broker dealer offer is much more challenging and potentially more lucrative than any mindless game on television. And while there are many similarities to Deal or No Deal selecting a broker dealer is not a game and the stakes very real and very high. Especially because your broker dealer agreement should be way more than just about money.

 

Deal?

As noted, it’s not all about money and negotiating singularly for the biggest upfront check is not always the best deal. Not only that, most deals are in the form of forgivable notes and these upfront bonuses come with a few or more strings attached.

Common examples:

  1. Transfer quotas- Some firms require that 70% or more of your client assets move over before you get any or all of the upfront bonus.
  2. You must be constantly produce between 70%-100% of the gross dealer commissions that you stated when you executed your contract.
  3. Some broker dealers will charge interest on the amount that you didn’t produce to burn off a portion of the bonus money received.
  4. You must stay at the firm for 5-9 years before deciding to make another move otherwise you must pay a prorated amount back to the firm - or meet in arbitration.
  5. You will pay taxes on the upfront transition bonus provided.

Additional facts to consider with respect to upfront payments:

  1. Most transition deals are structured over a 5 year period and you only required to pay taxes on the amount forgiven in that specific year.
  1. The good thing is that you are not required to take the maximum amount that you are qualified for. In fact, we recommend that you take less than the maximum for a few of the following reasons.
  1. The forgivable note is easier to burn off if you take less upfront because the quotas are reduced to reflect a lower amount of required GDC.
  2. You pay less in taxes.
  3. The mental stress is reduced if a recession hits your business or if sickness in your health or family’s health hurts your annual productivity.
  4. There are also advantages to taking less money to consider from a total deal stand point. It’s easier for a broker dealer to make internal accommodations such as lower ticket charges, higher payouts, lower administration fees on advisory accounts, fee waivers on monthly fees. In many cases, broker dealers would rather reduce certain fees than to cut you a physical check.
  5. There are also potential disclosure regulations coming down that pipe where FINRA may impose public disclosure on how much money the advisor agreed to take by joining the new firm. While it may not matter to some clients, it will matter to others and it’s not a very productive conversation to have-especially in a down market.

 

No Deal?

Upfront money should never be in the top 2 reasons to make a broker dealer change. Firstly, because most advisors will spend any and all money bonus money within the first couple of years of affiliation and secondly, because the larger the upfront bonus you accept the lower your payout will be.

Wall Street firms attract advisors with 100%-350% up front with back end deals to keep the advisor motivated and while that may sound lucrative a 22%-45% monthly payout isn’t- especially over a 5-10 year period. It also doesn’t help that in those scenarios an advisor has zero ownership in their book of business and can be fired at any time without any recourse. A simple calculation at a 90% payout versus a 45% payout will show that higher payouts will provide higher cash flow over a 5-7 year period than a huge upfront check that’s taxed annually.

That’s not even the most important factor to consider. If your broker dealer is more of a business prevention unit where there are a significant number of imposed challenges to growing your business year after year, then it doesn’t matter what the financial deal looks like. Finding a broker dealer that can provide you with great back office service, efficient technology, a solid marketing department with a quick approval process and a flexible compliance department that is not going to hinder your success are all the key ingredients to a long and successful broker dealer relationship. With that said, a broker dealer can offer you a 100% payout, but if you can’t bring new clients in and increase your business then 100% becomes the same as 0%.

 

The Broker in the Dark Room

The two most important parties in any broker dealer negotiation are You and the Broker Dealer recruiter. It’s important to meet this person and to get to know them well during your broker dealer visit. It is highly recommended that you visit 2-3 of your top BD choices to meet the head of recruiting even if you think you’ve made up your mind. There isn’t a worse feeling than knowing you made the wrong choice six months after you made a broker dealer change. By the time you’ve come to your senses, it’s too late to turn back. You have already spent the upfront money and your last client just sent back their signed new account form.

     The head of recruiting at every broker dealer must sign off on your deal, They must have the authority to:

  • increase your upfront bonus,
  • make accommodations on fees and

Each broker dealer has an internal Return on Investment calculator that helps them determine the broker dealer’s net profitability. Most firms will not break even on your deal for 24-36months from your first day of affiliation which is why most deals are structured at 5 years or more. Broker Dealers work on grocery thin margins and are not making the most of their revenue on the payout. A lot of the company revenue comes from ticket charges, monthly fees, clearing fees and soft dollars from sponsoring companies. We hear many advisor complain about their firm nickel and diming them for everything from calling the home office for questions to affiliation fees. On behalf of many broker dealers, it’s not easy to turn a profit from a broker dealer business stand point, especially with the cost of E&O, arbitration and regulatory land mines around every corner.

 

Take the deal or walk away?

 

So what do you do? With so much information, so many different choices and so many options, how do you decide?

The answer is to work with a professional independent recruiter who has an inside look and a clear perspective of what you need. Many advisors will not manage their own personal portfolio because they become their own worst enemy. The same can be said about making a broker dealer change. It’s the biggest decision to make as a financial advisor and a decision that most would agree not to make more than 2-3 times in their career.

     Independent recruiters are not paid to tell you only the positives about broker dealer firms. Our job is to give you the good, the bad and the ugly and to organize all the moving parts of each firm based on your needs within those firms. We help you make the best most informed decision possible in your next move and we have the advantage. Most independent recruiters work daily within a network of broker dealers and know the executives very well.   In most occasions we can let you know what the best deal for your situation can be before you even speak with any broker dealer. We also get feedback from advisors we have placed throughout the years and can provide you with real time opinions, best practices and the best transition insight.

   The best thing of all is that most independent recruiting firms, like RepRecruit, LLC are at no cost to you. Recruiters do earn a percentage of the GDC that moves over to the new broker dealer. However, it is of zero reflection on any payout, upfront transition deal or any accommodation you receive during your negotiation. In fact, you will most likely earn a much more lucrative deal working with an independent recruiter because we know where the biggest benefit on your deal can be accommodated.

At RepRecruit, LLC, we will be the first to let you know that sometimes the best move is not making a move at all. On the flip side, we can help you make the best choice-either way.

So here are some of the most important items to consider if you’re going to take the deal…

  1. Does the new firm have selling agreements with the current companies you work with?
    1. Is it a deal breaker if they don’t and can they get service only agreements on the carriers they don’t have?
  2. Do they clear through the same custodian that you are using or a better one that makes sense?
    1. Staying with the same clearing firm i.e. Pershing with Pershing, will save you and your clients money and transition headache. Termination and transfer fees are reduced or eliminated when you keep the same company.
    2. Will the new clearing platform provide better services, lower fees and better technology to my business and my clients?
  3. Are the monthly Errors & Omission fees, technology fees and platform fees reasonable for your business?
    1. It’s ok to have higher fees if they are warranted and benefit both you and the client.
    2. It’s even better to have lower fees, especially if you have no need for the bells and whistles automatically provided.
    3. Have you received a full list of services fees, technology fees, advisory platform fees, ticket charges, overnight fees, annual registration fees etc… in order to compare them with your current firm and other prospective firms?
  4. Is the culture and business philosophy in line with your own?
    1. Are they client orientated?
    2. Do they understand that you are the client at the broker dealer and that you are hiring them to service my business?
    3. Do they currently have a high satisfaction rating amongst their peer groups
    4. Do they have a good reputation or are they constantly headlining due to arbitrations and fines?
  5. Does the payout and upfront bonus help or hurt you?
    1. Sometimes a higher payout can be offset by higher fees
    2. Sometimes a lower payout can be offset by lower fees
    3. Will the upfront bonus cover all my termination and transfer fees from your current firm?
    4. Will the upfront bonus help you by covering your expenses during transition down time?
    5. Will any of the money help you earn more through hiring an assistant or launching a marketing program?

     With over 4,000 broker dealers across the country today, RepRecruit will partner with you to help you make the best and most informed decision possible- at no cost to you. We don’t tell you what you want to hear, we’ll tell you what you need to hear and help you negotiate the best offer. We’ll differentiate the moving parts of each broker dealer and narrow down the top firms based on your needs. Why take a chance in making the wrong move- call RepRecruit, LLC today for a confidential, no cost consultation today- and make it a great move!

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Considering a Broker Dealer Change? 7 Critical Details

This document is about deciding whether or not a Broker/Dealer move makes sense for you.


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Advisor Transition Readiness
Merger & Acquisition Readiness for Boutique Broker Dealers
Recruiting Readiness for BDs, RIAs & OSJs