For brokers in the independent broker-dealer universe, these are the best of times to consider switching firms. But if a leading compliance consultant is accurate, some of these whopping forgivable loans and up-front signing bonuses could come back to bite the reps who accept them.

Sander Ressler, the consultant, says his primary focus is on some of the deals LPL Financial has offered reps at various firms, particularly those firms that were most successful at recruiting reps from National Planning Holdings’ (NPH) four broker-dealers after LPL acquired the businesses last year. However, other consultants said that the problems extend far beyond LPL.

In March, LPL reportedly approached certain high-value reps at Securities America, Cetera Financial Group and Kestra Financial with lucrative recruiting packages entailing outsized forgivable loans. These three firms had been among the most successful in recruiting NPH reps. However, executives at other firms report that their reps have also received overtures from LPL.

Another factor complicating the situation is that LPL reportedly has considered making an offer to acquire Cetera. In February, Cetera announced it was exploring strategic options, which could entail anything from a recapitalization of its debt to an outright sale of certain assets or the entire firm.

All this uncertainty, coupled with the huge loans some firms are dangling, is prompting some reps to reassess their relationship with their IBD. “I am very concerned that advisors are missing a very serious issue when they accept transition deals like this,” Ressler said. “Advisors who take LPL or any other firm up on offers of outsized, up-front money are setting themselves up for potentially significant regulatory and legal downside risks.”

Within the independent channel, up-front checks for new recruits have almost always been in the form of forgivable loans that are finalized in negotiations between the advisor and the new firm, and then granted at the outset of the transition process, according to third-party recruiters. These forgivable loans have traditionally been based on a percentage of 12-month trailing revenues generated by the rep. Typical loan amounts range from 20 percent to 40 percent of that figure, but several firms are reportedly increasing loan sizes as the recruiting wars intensify.

One third-party recruiter cited LPL as being particularly aggressive in recent months. LPL has been offering prospective recruits from these firms 50 basis points on all transferable assets (advisory and brokerage) in the form of three- to five-year forgivable loans, he said. LPL has even offered 50 basis points on "all" assets, including assets held directly via fund complexes.

This translates into up-front money that is the equivalent of anywhere between 75 percent of trailing 12 months’ revenues to, in certain cases, well over 100 percent of trailing 12-month revenues. This is a huge difference by any measure relative to the industry norm, according to this recruiter. In a handful of situations, another recruiter reported seeing similar offers from a few other IBDs, only to a select few reps.

Here’s an example: One industry recruiter recently worked to transition an independent advisor, who had about $130 million in client assets, mixed across advisory and brokerage business, to LPL. This advisor was approached by LPL with an offer of $600,000 calculated via 50 basis points on all assets, which translated for this advisor into 120 percent of trailing 12 months production revenues

With retirement a little under a decade from now for this advisor, “the decision was a no-brainer for this guy,” the recruiter said. As to whether he was concerned about whether the move would impact clients, the recruiter’s recollection of the advisor’s statement was “hopefully, the LPL platform won’t be too different from what I’ve been using until now. But either way, I’m not too worried about my clients making a big stink about it.”

So what’s the problem? Brokers have been accepting forgivable loans and upfront bonuses for years to switch firms. While it may not look like a best practice to the public, it's widely accepted in the business.

“First of all, any time a registered rep accepts financial compensation in exchange for implementing a major business change that potentially impacts end clients, there is an instant shadow cast over the advisor-client relationship if there isn’t total transparency on the advisor’s part in disclosing the financial incentives from the outset,” Ressler argued. 

“And even if you do provide that level of disclosure to your clients–and let’s face it, very few do–there are a host of practical issues that will likely emerge in due course,” he continued. “If anything comes up once the advisor’s transition has been completed that a client feels created a negative outcome, and in response, the client chooses to initiate or become part of a legal action against the advisor, there is a clear 'guilty until proven innocent' position that the advisor is immediately pushed into.” 

This is where aspersions can be cast on a rep’s motivations. “Without question, one of the most frequent areas where such legal actions arise is in the areas of fees and expenses,” Sandler maintained. “Are there differences in the new firm’s investment product platform costs? Higher ticket charges? Increases in annual maintenance fees? Even a very slight increase in any of two to three dozen kinds of fees and costs for the end client could easily trigger a dispute, and these are the kinds of disputes that can impair or sometimes even end an advisor’s career. Under these circumstances, it’s exceptionally difficult to argue against accusations that you acted against your client’s best interests when you knowingly chose to accept a substantially higher than average, up-front transition check from your new IBD.”

At various junctures over the last few decades, regulators have questioned the integrity of the recruiting process in the brokerage industry and suggested that brokers be required to disclose any payments, loans or other inducements to clients when they switch firms. But the issue has always fallen by the wayside.

Sandler’s perspective is certainly outside the mainstream and probably would bother third-party recruiters as much as IBD executives and reps themselves. Several sources acknowledged that there were problems that often arise when switching B-Ds simply for upfront money, but they challenged the idea that these problems could be “career ending.” Others said that LPL is as sophisticated as any IBD and would not cross the line in recruiting if the strategy created potential liabilities.

There are, of course, other downsides to the forgivable loan game. Paramount among them is the message it sends to an IBD’s existing rep network about senior management's priorities. Specifically, when existing reps at a B-D see the firm spending huge resources on outside people and not loyal reps who have been at the firm for decades it is easy to conclude the firm is taking longtime reps for granted.