In 2009, CNBC held a town hall featuring Warren Buffett and Bill Gates. Among others in attendance were a few hundred Columbia Business School students.

One of the most memorable moments from the 90-minute event was when Buffett turned to the students and offered, “Right now, I would pay $100,000 for 10% of the future earnings of any of you. So, if anyone wants to see me after this is over … ”

While there were laughter and applause to be had, surely some of those students must have sat there and considered his offer. After all, $100,000 was an enormous amount of money—for people perhaps in their early 20s at best. Not to mention, many of the students probably even had a negative net worth at the time due to student loans. They likely thought that $100,000 was hitting the jackpot!

And yet not a single student took the Oracle of Omaha up on his offer.

Because they’d been accepted into Columbia Business School in the first place, these bright-eyed students were considering instead the high incomes they believed they could achieve over their entire careers. With that math in mind, $100,000 today in exchange for 10% over a lifetime seemed woefully underfunded—dare we even say, insulting.

No one took the offer.

Consider a few variables that the students understood:

1. Their long-term earning potential would easily surpass $1 million in the aggregate (the break-even point on the $100,000 up-front offer). Thus, they knew that if they could be patient and wait for their future income to arrive, as opposed to taking the “easy” $100K now, they would be better off. (Yes, we could complicate this math with a discussion about the time value of money, but eventually the math would still be favorable to a student willing to be patient regardless.)

2. The students also knew there was a high likelihood that their annual compensation would increase over time. Thus, taking the 10% deal now ($100,000) would result in a diminishing return each year.

Buffett would not really be “paying” these students $100,000. He would simply front them their own money while attaching very unfavorable terms in return.

Those terms made accepting the $100,000 deal such a disservice to the students that even if an inquiring student had followed up with Buffett on it, being the charitable man he is, he would probably renege on his deal for their benefit.

After all, if Buffett were being completely transparent, he would have phrased it this way: “I will pay you $100,000 now for 10% of all your future earnings, no matter how long your career is, and no matter how much your earnings increase over time.”

The lessons thus learned are:

1. Do not take a quick buck today when being patient is much more lucrative.

2. Do not take a deal today that is valued on your current situation (earnings) if you expect your earnings to increase over time.

3. Do not let someone “pay” you with your own money.

What This Means For Advisors
Let’s look at another scenario.

Let’s say you’re a financial advisor thinking of moving your practice to a traditional broker-dealer. As part of this move, you would receive a large up-front bonus check. Surely you’ve heard about the large checks firms have been “paying out.”

So, you sit down with Warren—I mean the local branch manager—who makes you an offer: The firm will “pay” you $X (perhaps $1 million) to join. Should you take it?

What if the message were more transparent? Put it this way instead:

The firm will “pay” you $X (perhaps $1 million) to join in return for an indefinite 15% to 20% haircut on your production, something you could otherwise have received yourself under an RIA model. You must stay at least 10 years, even though we know many advisors end up staying long past that. Either way, the haircut never ceases.

Furthermore, the broker-dealer is paying you the $X based on your current production. But we know you’ll likely grow your practice over the next 10 years or more, which means the haircut gets increasingly lucrative for the firm (and to your detriment) year after year after year.

The broker-dealer is not generously “paying” you from its own pockets. Yes, in terms of pure cash flow, in the year it is paid out, the money is technically “from” the firm. But in effect, the firm is simply advancing you your own future earnings, something you could have otherwise earned yourself under an RIA model. And for that, they are attaching equal, if not worse, terms than Buffett was offering the students.

We could dive further into the details and talk about the time value of money, taxation, etc. But make no mistake, the math always favors the firm. You’re not being offered those checks out of the kindness of somebody’s heart.

A casino will always allow you to make a quick buck today because the owners know the long-term odds are always in their favor. The math is no different with up-front recruiting checks.

Perhaps the firm you want to join is appealing for other good reasons. But just as Buffett’s seemingly generous offer did not blind the Columbia students, do not be blinded by seemingly generous up-front recruiting checks either.      

Brad Wales is the founder of Transition To RIA, a consulting firm.