Digesting the Impact of the DoL’s New World Order on Recruiting Deals
A week later we take a look at where we are and where we might be headed.
I am deliberately writing this update to last week’s piece at a time when we have very few answers—especially with respect to the positions that all firms will take as a result of the FAQs the DoL put out on October 27th. My intention is to offer an objective perspective on the impact that this new paradigm – the genesis of which is the DoL’s regulation of our industry – will have on advisors in terms of recruiting and movement, regardless of the position that each firm on the street chooses to adopt.
To make sure we are all on the same page, I wrote last Friday that the DOL’s stance is that “large back-end revenue and asset awards which are expressly contingent on the advisor’s achievement of sales or asset targets can create acute conflicts of interest” in violation of the Rule’s intent: To create a uniform Fiduciary standard. As a result, all firms are deep in the lab trying to come up with alternative deal structures—effectively eliminating revenue and asset bonuses from their transition packages and/or significantly altering deal terms as we know them.
Based on where we are now, and what we have heard or seen, our thoughts are:
- The days of high water mark transition deals have come to an end. Even if some firms choose a less risk-averse interpretation of the DOL’s intent, and thus take a more gradual approach to terminating back-end revenue and asset bonuses, it would likely be just a temporary measure. Expect deals to look very different as of April 2017 or quite possibly even sooner.
- As a result of transition packages in the wirehouse world likely coming down, the playing field has been leveled. Advisors will be freer to choose if and where they move based less upon the short-term economics and more upon fiduciary-driven factors, not the least of which are “Where will my clients be best served?” or “How do I want to live my business life?”
- In a post-DoL world, advisors will assess where they want to work using metrics beyond short-term personal financial gain. They’ll turn their focus to platform, technology, intellectual capital, goals and ongoing economics, using a long-range lens to assess what they want to be when they grow up.
- I believe that more advisors will go independent because that’s what many of them wanted to do in the first place. I have long said that in a perfect world, where economics didn’t matter or where they were equal amongst alternatives, most advisors would choose not to move between wirehouses, but instead go some version of independent. And, as the indy landscape has evolved and expanded, there is no shortage of models that allow advisors to choose the exact modicum of independence they desire. (After consulting with many thought leaders in the independent space, it appears that investors who look to acquire RIA firms and craft deals predicated on applying multiples to EBITDA are not in violation of the DoL Rule in any way—this is great news for anyone who is thinking of going independent with an eye towards eventually maximizing enterprise value.) And, for those less entrepreneurial folks, the regional firms offer a legitimate alternative and their deal economics will likely be in parity now with the wirehouses.
- Make no mistake: The easiest move to make – and the one that would feel most familiar and plug-and-play – will still be from one major firm to another. And, for now anyway, there are still some very attractive transition packages being offered to advisors who want to work in that world and monetize for what will undoubtedly be the last of the uber-deals. I believe, too, that even after the dust settles, every firm will need to figure out a new way to creatively structure its deals to make them DoL compliant, because recruiting is still such an important piece of their growth strategy. Said another way, they will still be very much open for business.
- In reality, the 330%+ deals that the wirehouses had been offering were, in many cases, illusory. A very small percentage of advisors hit the entire back-end portions of them, making the transaction worth 200-250%. So if firms raise their upfront deals, and reimburse more deferred compensation, the delta between the old deals and the new reality is much smaller than it appears.
As of this moment, the industry has been rocked and it feels like mayhem as everyone digests and comes to grip with what will be a “new normal”. But, I know this for sure: Advisors who run compliant, mostly fee-based businesses with a fiduciary mindset will continue to thrive. There will always be opportunity and optionality for them as they think through their next moves—even though the solution set may look different than it would have just a short week ago.