For B-Ds to continue offering large notes, they must continue to earn large margins years into the rep relationship. But don't expect a clause in the loan agreement contract saying that existing fees can't be raised or that new ones can't be levied. Fee compression is real.
Plus, it's expensive to provide big transition packages. In fact, to protect their investments, some B-Ds have bought life insurance policies on financial planners with forgivable loans of $100,000 or more. There are also financial risks in loans that are based on time and the associated interest.
These problems shed light on the obvious conflicts of interest in forgivable notes, conflicts that become more acute when a recruit brings new advisory client assets over during their first year with a firm, triggering bonuses and calculation adjustments after the fact (adjustments known as “true-ups.”) Financial advisors are systemically encouraged to funnel advisory assets onto these platforms, which, again, will likely grab the wrong kind of attention. It could also be that advisors will be required to disclose to clients their forgivable loan amounts—and their sources—at some point, and the PPP loans taken out during the Covid-19 crisis may end up being the spark that gets this started.
For these reasons, more advisors may reject the forgivable loans and seek out firms with lower advisor and client costs. Or they might otherwise take smaller notes or grants to cover only the actual hard-dollar costs of a move.
Such alternatives allow broker-dealers and RIAs to provide a better long-term financial partnership with advisors, offering higher payouts and/or reduced fees in which the advisor nets more over time while acting in a fiduciary manner.
If the relationships with the broker-dealers are stronger for all this, it’s more likely the advisors will stay with their firms, an advantage the B-Ds will appreciate at a time when firms like Vanguard are trying to capture their retail financial advice clients. These better arrangements would also make it easier for advisors to move, and ease the cost of moving their clients (depending on the custodial relationships).
Advisors shouldn’t have to worry about looking over their shoulders to see which regulators are watching them. One chief compliance officer I spoke with on the topic of a questionable business practice put it this way: Just because something's allowed today doesn't mean it won't haunt you later.
As the big broker-dealers do battle, the big compensation packages are still being offered to woo advisors away. But it’s these large transition packages that contribute to the debt mattress much of the industry is sleeping on.
Will all be forgiven? Time will tell.
Simon Hoyle is a Strategic Business Director at Henschen & Associates, a recruiting firm based on best match introductions to RIA/tuck-in/hybrid model partners focused on high retention.