Perspectives into the Private Wealth Management Industry

Posted on Kaye/Bassman’s Private Wealth Management Recruiting blog on April 12, 2013

Newton’s First Law

Regarding the proposed FINRA disclosure requirements concerning Enhanced Compensation, it comes as no surprise that the major firms are behind such a move.    Why?

It’s quite simple really.   Under the current deal terms offered by the top 4, the break-even point on a financial advisor producing $1M a year is 13.6 years.   I’d be happy to show you the math if you’re interested in seeing it.  If you approached any rational investor with a request for capital and told him or her that it would take 13 years to break even on your investment proposal I can promise you it would be a short conversation.

The only way the major firms would be willing to curb the escalating deal terms is to have FINRA craft a rule that would make changing firms less appealing to advisors.   If FINRA were to make a rule, it would create a level playing field and relieve any one firm from making the first move which would put them at a competitive disadvantage.   The fact that the industry Private Wealthframed such a rule under the pretext of protecting investors from conflicts of interest generates good PR, but that’s all it does.  If you do some deep analysis as to how many investors have been harmed as a result of enhanced compensation, you would find that there is statistically no difference in the relative number of customer complaints comparing the 2002-2007 and the 2007-2012 periods.

Looking forward once the rule is enacted, I believe you will see these major firms taking steps to modify compensation packages; ultimately resulting in a salary bonus model much like the one JP Morgan Private Bank now has.   Take a look at exactly what the proposal says, and draw your own conclusions as to whether or not this is the best time to make a change.   It’s also no surprise that the proposed rule comes when most of the best, top producing advisors still owe their firms too much from retention or recruiting loans.

Source: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p197599.pdf

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