Those big fat recruitment payouts that wirehouses and banks are known to give top producers are getting leaner-increasing the incentive for advisors to go independent, according to a new white paper.
The research report by Sanctuary Wealth Services LLC notes that while the total value of recruitment packages has increased in recent years, firms have reduced the level of front-end payments, lengthened the duration of forgivable loans and reduced the payouts on production.
The terms of the packages have also become less favorable to advisors, often demanding annual business growth that may not be sustainable in today's market, according to Sanctuary Wealth.
"Firms can't afford to write the same type of forgivable loans they did in the go-go years before the financial meltdown in 2008, nor can payouts remain at the levels that existed in the past," write the authors of the white paper, entitled, The Illusory Recruitment Check: What's Next For Wealth Advisors.
In past years, the report notes, it was not unusual to see an advisor get 100% of a forgivable loan's value up front. Now an advisor typically gets 50% to 60% up front, in a recruitment package with a five- to seven-year term, according to the report.
Sanctuary Wealth estimates that in today's market, the average advisor will only ever see 10% of the back-end value on a recruitment deal.
Industry payouts have declined from about 40% to 45% in 1990 to 30% to 35% today, according to the report.
The trend points to a growing argument for advisors to seek an independent business model, according to Sanctuary Wealth, which serves the independent advisor market.
"The new reality, coupled with declining product margins and lower overall firm profitability, implies that the payout on advisor production will continue to decline," the authors state.
The full white paper can be viewed here.