Advisor Recruitment: The Bull and Bear Case for a Forgivable Loan

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An expanded landscape with more options than ever before has advisors wondering: “Should I go for the short-term windfall or bet on the long-term potential?” And there are good cases for both options.

The merit of forgivable loans tied to recruitment is an age-old debate amongst advisors and industry professionals. The decades-long convention for advisors considering change (especially those in the W-2 world) is to recapitalize the business by negotiating a lucrative transition bonus with competing organizations. On the other hand, executives who wear the jersey of an independent firm or platform often rail against “deals” and instead talk about building long-term enterprise value and controlling one’s own destiny. 

Is it wrong for an advisor to seek monetary remuneration for taking the risk and going through the hard work of a transition? Absolutely not! 

Or is it better for advisors to self-finance their move and focus on the longer-term economics of independence? 

The answer truly depends upon what an advisor values most. 

An expanded wealth management ecosystem has resulted in advisor movement that has become so fractured, there is no clear winner in the race to capture recruitment market share. In large part it’s because business models offering disparate economic packages all exist to service advisors who differ in their life stages, risk tolerance, ambitions, vision and style of business. 

So who’s right when it comes to recruitment deals? Let’s look closely at both sides.

The Bull Case

  • Life-Changing for Many Advisors
    A recruitment deal in the W-2 space can range from 150-300%+ of an advisor’s trailing 12 month’s revenue and represents life-changing money for an advisor and their family. Many of our advisor clients have talked about making one well-timed move as the best way to maximize career enterprise value and “set their families up for life.”
  • De-Risking a Move
    With any transition, there’s a good deal of risk to an advisor’s business. Firms typically fight hard to retain clients, and ultimately there will always be certain relationships that may remain with the firm—whether by their choice or the advisor’s. One of the reasons transition deals exist is to help advisors de-risk the move and, in many cases, give an advisor some financial confidence should there be some “breakage” so that they have a lucrative safety net to fall back on.
  • Rewarding Hard Work
    For those advisors who spent years grinding away while building their businesses, they often look to a recruitment package as a “reward” and an opportunity to “take the pedal off the metal” for a bit and perhaps focus more on work/life balance.
  • Incentivizing Future Growth
    Recruitment deals most always feature backend bonuses or earnouts to help firms share risk and incentivize growth. For some, the growth elements of the deal are welcomed incentives to catalyze growth and more proactive business development.
  • Making a good move even better
    For those advisors who are leaving an environment where they were less than satisfied and transitioning to another that is a better fit, the recruitment check is the “cherry on top”—that is, a win-win from their perspective.

The Bear Case

  • Locking-In for the Long-Term
    Recruitment deals last anywhere from 9-13 years, with some firms tying backend bonuses to even longer commitment periods. That’s a long period of time, especially in an industry that is wracked with flux, but even more so for W-2 advisors who are never in full control of their destinies. Thus, advisors are often “locked up” in the event of significant changes to compensation, culture, overall morale or even if their firm is sold. Sure, advisors can pay back the unforgiven portion of a deal, but the mental handcuffs are real—and some advisors struggle to raise the capital necessary to buy-out the remaining years.
  • Losing a Larger Portion to Taxes
    As W-2 employees, any transition package is taxed at the higher ordinary income tax rate vs. the more favorable long-term capital gains rate available when an advisor sells all or a portion of their equity in the independent space.
  • Giving Up More Control
    As more advisors are tied into long-term recruitment deals or sunset programs, firms possess more leverage and control to push through policy directives or announce major strategic changes.
  • Opting for the Deal Over Client’s Best Interests
    While most advisors act in the best interest of clients, there is a perceived conflict when advisors opt for their second or third choice firms because those firms are offering the best deal.
  • Conflicting Team Views of Short-Term vs. Long-Term Economics
    There are times when members of a team may find themselves on different pages as some may prioritize the short-term economics of a deal vs. going independent to build equity and capture a higher payout. It’s friction that often develops when conducting due diligence and often leads some teams to choose different paths. 
  • Implying a “Sale” of the Business to a Firm
    Some view recruitment deals as the receiving firm “buying” the advisor’s business. Although the transaction is not structured as a sale, the majority of W-2 firms legally “own” the business and underlying client relationships. This is one reason why RIA custodians and independent firms offer little or no upfront capital as advisors moving into this segment of the landscape own their clients and equity.
  • Selling the Business Short
    Depending upon the makeup and scale of the practice, traditional recruitment packages – especially on an after-tax basis – are worth less than what an advisor could transact their business for on the open market. Businesses sold in the independent space trade for a multiple of EBITDA—and with hundreds of prospective buyers there is more competition which ultimately drives price.

This article will likely not settle the debate over whether forgivable loans are good or bad—because the truth is there is no “right” answer. It’s really dependent upon what’s most important to the advisor. So start by asking yourself:

  1. Do I have a short-term financial perspective or am I willing to think more long-term greedy? 
  2. Where do I believe I can best serve clients and live my best business life: as a W2 employee of a traditional firm or as an independent business owner? 
  3. What stage of my career am I in and what’s my risk tolerance? 
  4. Do I value the familiarity and turnkey infrastructure of a W-2 model or does building a business excite me? 

The exciting thing about the landscape today is that regardless of how an advisor answers the above questions, the result is that there are plenty of destinations to choose from.

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