What recruiting loan balances say about big wealth managers

How much value is there to industry recruiting?

Some of the biggest firms in financial planning apparently think the answer is: quite a lot. For evidence of that, look no further than the recruiting loan balances wealth managers report in annual filings to the Securities and Exchange Commission.

These loans — technically promissory notes — usually come in the form of an upfront payment that advisors receive upon joining a new firm. The balances typically "vest," or are forgiven, on a set schedule anywhere between seven and 12 years.

As long as newly recruited advisors stick around for the duration, there's no need to pay anything back. But if they leave early, they can owe amounts running into the millions — a powerful incentive to think twice before accepting another recruiting offer.

The past few years have seen some industry leaders take their balances to near-record highs. The clear standout has been LPL Financial. In its zeal to attract talented advisors and teams, the independent broker-dealer saw its balance for outstanding recruiting loans increase more than threefold from just under $400 million in 2018 to more than $1.4 billion last year.

READ MORE:
Fight over promissory notes intensifies with Morgan Stanley's $5M clawback
Fighting the tides of wirehouse attrition
Merrill leaps back into recruiting with $3.5B team from JPMorgan
Advisor headcounts are going away. Recruiters say it's about time
Advisor barred over outside investments owes back Wells Fargo recruiting loans

On Wall Street, Morgan Stanley has been the biggest player. Despite its former CEO James Gorman's declaration that "the recruiting game is over," Morgan Stanley increased its loan balance by 27% to just over $4.3 billion from 2018 to 2023.

No limit?

Jason Diamond, an executive vice president at the recruiting firm Diamond Consultants, said there's no real reason why these balances can't keep going up. He noted that the loan amounts advisors receive are usually based on their track records of generating revenue.

Often they're calculated as a multiple — two or three or even four times — of a wealth manager's past 12 months of income generation. Provided there isn't a steep dropoff in performance, and the advisor sticks around, the loans pay for themselves.

"These firms should be making enough revenue that by the fourth or the fifth year on the loan they are breaking even on the loan balance," Diamond said.

Philip Waxelbaum, another industry recruiter and the founder of Masada Consulting, said some industry executives have taken deliberate steps in the past to lower their balances amid worries that the numbers were growing too large or the deals were being poorly managed. But a loan number by itself isn't much of an indicator of whether a firm has become overburdened.

"As long as margins are growing and revenue is increasing, it's not a problem, right?" Waxelbaum said. "But if revenue is not increasing and margins are narrowing, it's a big problem."

Link to revenue

Though the connection between loan balances and financial performance isn't perfectly clear, there is at least some correlation.

LPL, for instance, saw its revenue increase by nearly 94% to $10 billion from 2018 to 2023. And Morgan Stanley experienced a 52% increase in its wealth management revenue in the same period, taking the total to $26.3 billion.

A spokesperson for LPL said, "LPL's recruiting efforts are fueled by a winning value proposition which continues to attract advisors and institutions seeking a partner for their businesses. LPL is well positioned to make strategic investments, including transition assistance to deliver value to our clients and drive long-term growth."

None of the other firms contacted for this article provided a comment.

Meanwhile, wealth managers with lower or declining recruiting loan balances have seen much more stagnant revenue growth. Bank of America's Merrill, for instance, publicly backed away from recruitment as its primary plan for growth after its loan balance swelled to $1.1 billion in 2017. Its outstanding loans fell a precipitous 75% over the next five years to roughly $271 million.

Revenue production for both Merrill Wealth Management and Bank of America's private bank increased by only 17% to $21.1 billion in those same years.

Merrill has since announced a return to recruiting. But it has yet to report its loan balance for 2023, making it hard to gauge just how far its renewed commitment extends.

Wells Fargo has likewise witnessed similar stagnation even while still professing a strong commitment to recruitment. Wells, perhaps struggling to attract teams while still coming out of the shadow of past scandals, saw its loan balance decline by 8% to just over $2.2 billion from 2018 to 2023. Its wealth management revenues were down 10% to $14.7 billion in the same period.

Waxelbaum said he thinks Wells has repaired its reputation enough to see a rebound.

"That cloud has parted, and they're recruiting like machines right now," he said. "If we could look at Wells as far out as two years from now or three years from now, I would expect them to be considerably larger than they are today."

For firms that have struggled with recruiting, Diamond said he suspects the hit to revenue would be far more apparent if the economy weren't so strong. With most firms collecting fees based on the amount of assets they have under management, recent bull markets have done much to buoy balance sheets.

Regardless, Diamond said, the connection between recruiting and growth is clear. In an industry that struggles to attract young newcomers, recruiting is one of the main ways firms still have to grow.

"If you're not recruiting, you're doing worse than standing still," he said. "People are leaving left and right. They are changing careers. They're retiring. They're changing firms. They're going independent. There are so many reasons advisors choose to leave a firm."

Samantha Sferas, the chief operating officer at the Terrana Group recruiting firm, said she thinks firms' recruiting loan balances rarely present a hurdle to executives who have set their eyes on a high-quality advisor or team.

"If it's a great book of business and a great practice, I don't think it's any barrier," Sferas said.

Not necessarily a good proxy

Offering good deals may be essential to a firm's ability to attract quality advisors and teams. But that doesn't necessarily mean large loan balances are a proxy for recruiting success.

For one, noted Andrew Tasnady, an industry compensation consultant and the founder of Tasnady & Associates, balance figures don't shed light on whether firms are actually adding advisors or simply replacing the ones who have left.

With many firms no longer reporting headcounts, it's hard to tell which are swimming ahead and which are simply treading water. Tasnady said he suspects Wells Fargo, which stopped reporting its advisor numbers in 2023, has been mostly filling vacancies left by people who've decamped for other firms.

"They probably have a higher (loan balance) now because of the number of years that they had higher attrition," Tasnady said. "And maybe that's subsided. And it could be also a good sign because it shows people the company is willing to invest in the long-term future."

Among firms that still do report advisor numbers, there are signs higher loan balances can boost headcounts. UBS, for instance, has seen a decline in both figures.

Its loan balance declined 24% to $1.75 billion from 2018 to 2023. Meanwhile, its advisor headcount for its Americas division fell to 6,117 from 6,850 in the same period.

"UBS, you know, was very high for a number of years, and they stepped back from recruiting," Tasnady said. "You can see the number go down. That was a conscious effort."

Besides attrition, there's another reason why loan balances are an imperfect proxy for firms' recruiting successes. Waxelbaum noted that recruitment offers vary greatly from one deal to the next, making it impossible to tell how many advisors a firm had to bring on to reach a certain balance number.

With wirehouses, the upfront payments often range between 300% and 400% of an advisor's past year's revenue. The amounts tend to vary depending on the perceived quality of an advisor's business, Waxelbaum said. A wealth manager who mainly generates fees on assets under management is generally going to be able to command a higher offer than someone who relies mostly on commissions, he said.

The offers also vary among the different business models in the wealth management business. Raymond James, whose loan balance rose 26% to $1.17 billion from 2018 to 2023, is the standout among its non-Wall Street firms in that its deals have gone closer to those offered by the wirehouses.

Its regional competitors like Stifel, whose balance rose 67% to $683 million between 2018 to 2023, tend to offer around 200% of the past year's revenue or less.

"And whenever you look at these loan balances, you're looking at anywhere from a seven- to a 10-year average," Waxelbaum said. "So the chart doesn't go parabolic ever. It's just a trend line. It's just: Is the trend line accelerating or decelerating?"

They're only going up

Jodi Papike, the CEO of the independent advisor and executive placement firm Cross-Search, said she expects recruiting deals to keep growing in size. That's partly, she said, because of the amounts firms owned by private equity are able to splash around.

Advisors who might have formerly been on the fence about switching firms now suddenly find themselves presented with offers they can't refuse.

"It has kept recruiting at a really high pace over the past few years," Papike said.

The higher loan amounts have not only led to executives insisting that new recruits stick around for a longer number of years before the amounts are forgiven; they've also given firms additional incentive to seek clawbacks from advisors who do leave early.

When disputes over promissory notes end up before industry arbitration panels, the amounts that have to be repaid now often include interest, Papike noted. For most firms, she said, the real question about recruitment loans is about how long they can go until they recoup money they had to lay out to bring an advisor on in the first place.

"You're not going to make any revenue on a new advisor for several years," she said. "That has become the industry standard. It's up to the individual firm to decide if that makes sense or not."

Diamond said he thinks plenty of firms at this moment would be happy to make more recruiting loans if they only could. If anything is holding balances back now, it's not fear that the burden is growing too heavy.

"If they see good deals, they are going to take them 10 out of 10 times," he said.