March 3, 2023
Jason Diamond Quoted
by Victoria Zhuang
Recruitment of financial advisors was brisk last year and downright frenzied in the last six months, even as markets took a downturn, a new report shows.
The number of experienced brokers who switched firms shot up 12% over last July through December compared to the first six months of last year, a Diamond Consultants advisor transition report released March 1 showed.
“We thought that market volatility might potentially lead to a recruiting slowdown,” Jason Diamond, the firm’s vice president, and senior consultant said in an interview. “Recruiting actually picked up.”
An earlier report by the firm found that 4,249 experienced financial advisors moved in the first half of 2022, an average of 708 advisors per month. That swelled to 4,757 advisors in the second half, an average of 793 advisors per month.
In total, 9,006 experienced advisors who do business as brokers switched employers in 2022, the report said. Industry research firm Cerulli Associates estimates there are around 300,000 financial advisors in the U.S.
Wealth management firms hungry for talent offered “the most competitive transition deals we have ever seen,” the report’s authors wrote. Diamond Consultants was established in 1998.
“Firms also got creative with deal structures,” the authors wrote.
Additional enticements included “customizing hurdles to match a team’s special circumstances, extending notes to unlock more liquidity, uncapping backend earnouts.”
In some cases, firms offered “guaranteed amounts and/or salaries as opposed to the traditional upfront/back-end hurdle structure,” appealing to advisors who prefer a guaranteed payment to a conditional one. Or they would offer to pay other sweeteners, anticipating when a broker would be financially available to leave.
Broker dealers in some cases even “started writing deals as a function of basis points on assets, which proved to be an attractive option for many,” the authors wrote.
Independent firms are also paying more. “Deals were historically probably closer to about 30% of advisors’ revenue, and they’re now creeping up towards more like 40 to 50% of an advisor’s revenue,” Diamond said. “There are some firms that actually pay much more than that.”
However, many of these same deals also come with tight strings as firms will attempt to guard closely the advisors they have paid so much to attract over.
Patterns at different types of firms
While every type of firm logged a mix of inflows and outflows of advisor talent, from wirehouses to regional broker dealers to boutiques and independents, independent firms won out the most — underscoring a trend of advisors increasingly seeking independent affiliation away from Wall Street wirehouses.
“The rich got richer,” Diamond said, referring to the hefty recruiting deals that these larger independent broker-dealer firms, such as LPL, are known to make.
Firms offering supported independence, like Sanctuary, were especially successful in winning productive teams. All told, the authors counted 30 teams that each managed over $1 billion of client assets moving in 2022.
Among wirehouses, only Morgan Stanley reported a net gain in employee-channel advisors for the year, with 189 net advisors added following a years-long effort to put wealth management at the core of its formerly investment-banking-focused business.
Merrill was quiet on hiring and frequently lost large teams as it focused on hiring younger advisors and private bankers. But the institution has signaled that it wants to get back into the recruiting game for experienced advisors.
UBS, after a lackluster first half of the year, aggressively hired in the second half with what the report authors called a “get it while it’s hot” limited-time recruiting deal. RBC and LPL also offered such deals, the report noted.
Wells Fargo succeeded in recording a net headcount gain for the first time in several years, the report said, by the end of 2022. Wells saw large outflows from its employee channel but was able to keep many of those employee advisors in-house by transitioning them to independent affiliation with the FiNet channel.
With the exception of JP Morgan Securities, boutique firms had a very strong year led by heady gains at Rockefeller and First Republic. Regionals also had a good showing, outside of Edward Jones, which suffered notable attrition with a net loss of 180 advisors — often to competitors like Ameriprise, Commonwealth, and the independent channel of Raymond James, Diamond said.
Private bankers, in the past ignored because of the complications of recruiting them, are also being courted more as firms lust after ultra-high net worth clients. In September, Merrill poached Citi private banker Frank Falco who managed $2 billion of AUM, a deal that Diamond facilitated.
“Wirehouse attrition is likely to stabilize or even reverse,” the authors wrote, predicting that the firms would find ways to appeal more to advisors. However, those who go independent are unlikely to go back the other way to W-2 affiliation.
Methodology and outlook
The report looked at data for financial advisors who have spent three or more years in practice as licensed brokers. It did not include advisors who left brokerage work together to pursue purely fee-based independence at registered investment advisors, meaning overall, the number of advisors leaving firms is even higher.
The report authors classed independent broker dealers, RIAs, hybrid RIAs and insurance BDs into one bucket as “independent.”
Diamond staff sourced the data from a variety of online industry resources, basing it off the Discovery Data database and Cerulli research, as well as their own internal transition data and reporting on moves from trade publications.
Often, the authors wrote, advisors were motivated by enticing deals, but also by frustration with perceived restraints of bureaucracy at their former firm — in many cases, the wirehouses.
The frenetic recruiting season could cool later this year, Diamond said, given that “sometimes financial advisor movement is a little bit slow-moving” to follow the market. In other words, the market volatility of the past year, while not felt yet in the talent market for wealth management, “could translate to a slowdown ahead.”
Advisors who were already preparing their move before the market slowdown will probably go through with it anyway, but others beginning due diligence — the process of exploring new firms and determining if they are a fit for the advisor — might ease up for a while.
However, the report authors wrote, in previous recent periods of market instability such as the 2008 recession and 2020 COVID-19 pandemic, recruiting slowed but quickly rebounded, which suggests that any new slowdowns would be unlikely to change long-term trends in the industry.