Firms are scrambling to overhaul their recruiting strategies in the wake of new regulatory guidance on the fiduciary rule, which said that the back-end awards that are part of many recruiting deals "can create acute conflicts of interest."
Head hunters, managers and other industry insiders say the department's new regulations have reset the rules of the recruiting game — but no one knows what new deals will look like.
"I'm sitting on pins and needles," says a recruiter who is in the process of moving advisers and asked not to be named.
The Labor Department's latest guidance landed on Thursday, prompting Morgan Stanley to cut back-end comp from its recruiting deals – and providing the industry with a template for what such deals may look like going forward.
The wirehouse's offer to new hires consists of front-end awards only and is equal to about 150% of an adviser's 12-month trailing production, according to a person familiar with the matter.
"We're going to remain competitive – but what that means remain to be seen," this person said
UBS is still evaluating how to restructure its recruiting deals, but the firm sees the department's language on the permissibility of back-end comp to be clear cut, according to a person with knowledge of the matter. The wirehouse sees no way around the regulation. The firm declined to comment.
The other wirehouses as well as several major regional and independent broker-dealers either did not return multiple calls seeking comment or declined to comment because they were still reviewing the rule.
While firms rework their strategy, many advisers, managers and recruiters have been left in the lurch.
Plus, advisers with $450M in combined AUM join Benjamin Edwards.
A head hunter says he has over 20 advisers with offers from firms but doesn't know if firms are going to honor them now. "We have to find out what's going on for them," says the head hunter, who asked not to be named because some firms have been telling recruiters not to discuss the matter.
Morgan Stanley is modifying any offers that were pending, according to the person familiar with the matter.
LOOPHOLES?
An executive at a regional firm who asked not to be named due to the sensitivity of the matter said his firm's top management and attorneys were still working through the details of the new regulatory guidance. But in the meantime, the firm would stop printing new offers.
The executive says they are exploring alternative options, such as possibly tying back-end awards to length of service or another metric that would not create a conflict of interest in the eyes of the Labor Department.
Howard Diamond, chief operating officer and general counsel at Diamond Consultants, a recruiting firm, says that the back-end deals will likely be gone after the fiduciary rule takes effect on April 10.
"From now until the end of the year, many firms will still be writing deals – and some maybe further than that, to maybe April 9," he says. "We're hearing some firms say that the DoL can't legislate through FAQ."
However, several managers and executives see little chance that firms could find alternative methods to keep back-end bonuses.
"There are ways to potentially be cute with it. You could potentially cut out retirement business from the back-end bonuses," says a former Merrill Lynch executive who now works in the independent space, but who asked not to be named because he was not authorized by his firm to speak.
Tempting as it may be to find loopholes, it'll be hard to justify that and stay in compliance, the executive says.
"Cute doesn't usually work when it comes to regulators," he says.
A Labor Department official says regulators would be scrutinizing such moves.
"People should be careful about looking for ways to evade these requirements. If they literally tied what you made on the non-retirement accounts … that's too cute by half," says the official who asked not to be named because he was not authorized to speak.
LEVELING THE PLAYING FIELD
Adding back-end awards to transition deals became normal practice over the past two decades as firms looked for ways to be more enticing to potential new hires, says Andy Tasnady, a compensation consultant.
"Now the deals can add up to 200%, 300%, and they are over nine years. The only way to structure those and make them profitable is to make sure people are doing the behaviors they need to make it profitable," Tasnady says.
In recent years, the deals have become too costly for some firms, industry insiders say.
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The largest recruits managed more than $17 billion in client assets.
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The largest teams to go indie this year managed more than $5 billion in client assets.
July 7
"It is very difficult to pay the size of the deals that they are paying and still make money," says Patrick Mendenhall, an ex-UBS manager and current managing partner at U.S. Capital Advisors, a firm with 44 advisers.
The new regulations may be an opportunity to cut such bonuses, says a former Morgan Stanley manager who now works in the independent channel and asked not to be named. He points to the emphasis on boosting profit margins at firms such as Morgan.
But, this manager says, if the biggest firms cut the size of their deals then it might help smaller independent and regional firms. "It might level the playing field."
