How DOL is Changing Sign-On Bonuses and Other Indie BD Procedures

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In his most recent ThinkAdvisor article, “How DOL is Changing Sign-On Bonuses and other Indie BD Procedures,” independent channel broker-dealer recruiter Jon Henschen observes that a profitability shell game is going on, as profit centers such as ticket charge markups are sacrificed while advisory administration fees increase.

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Jon Henschen

A profitability shell game is currently going on, as profit centers such as ticket-charge markups are sacrificed while advisory administration fees increase.

Jon Henschen’s June 13 ThinkAdvisor article, “How DOL is Changing Sign-On Bonuses and other Indie BD Procedures,” discusses how the wirehouse channel is cutting back dramatically on upfront money offered to join their broker dealer, citing the recent case of Merrill Lynch, which is trying to grow without offering traditional sign-on bonuses.

His article observes that DOL rules are having an impact on the independent broker-dealer channel as well, but not in ways you may think. Of the 3,902 FINRA member firms (as tracked by Fishbowl Strategies in late February), approximately 25% offer some form of forgivable note (or sign-on bonus) to aid in the expenses and disruption of a broker dealer switch. Much of this is concentrated in the top 50 independent broker dealers by revenue.

Henschen states that, “A profitability shell game is currently going on, as profit centers such as ticket-charge markups are sacrificed while advisory administration fees increase. Recruiting has been impacted to a degree, primarily in the form of recruiter layoffs at several broker dealers. Sign-on bonuses have not changed dramatically, with the exception of Jackson National broker-dealers National Planning, SII, Invest and Investment Centers of America.”

The article continues by examining how the DOL rule affects various independent broker dealer procedures.
One DOL-influenced trend is advisor profitability. Bonuses are increasingly based on profitability of an advisor’s practice rather than based solely off gross dealer concession. Henschen notes the case of the Jackson National broker-dealers, which historically offered sign-on bonuses up to 40% of an advisor’s trailing-12-month gross dealer concession. In early 2017, these bonuses dropped to 10-15%, possibly 20% if the advisor’s practice is especially profitable.

Henschen continues by discussing low and high profitability books, identifying which product mixes fall into which categories, and offers an example of the difference on sign-on bonus.

Another change spurred on by DOL, according to Henschen, is forgivable notes based on time only, with no production requirements required by the note. For example, previously, an advisor might have been required to maintain 80% of the production amount on which the note was based. However, FINRA now believes that having a production requirement tied to the note has the potential to be a conflict of interest.

Henschen offers another possibility why Jackson National broker-dealers are lowering sign-on bonuses: the recent decline of variable annuity and fixed index annuity sales. According to the global research and consulting firm LIMRA, fixed index annuity sales were off 13%, while variable annuity sales declined 8% from the prior year in the first quarter of 2017. Insurance-owned broker dealers are rarely profitable endeavors and if they do manage to be profitable it is most always marginal, so when the parent company’s primary profit center (annuity products) is compromised, these BDs resort to cost cutting and/or consolidation. See Henschen’s article, “BD Back-Office Consolidation: Profit Bonanza or Service Boondoggle?” Henschen once again turns to Jackson National, which centralized recruiting to Denver in 2016. This move likely resulted in the expansion of centralized back-office services.

“Meanwhile, insurance companies with broker-dealers are getting skewered by a four-pronged combination of higher DOL expenses, lower profits, continued low interest rates and/or future stock market corrections that derail insurance company actuarial assumptions, and the decline of VA/FIA product sales,” says Henschen.

Henschen concludes by noting that as the costs of DOL rules become more transparent, the independent channel may see a decline in sign-on dollars offered across a broader segment, but for now no big changes are occurring. This is because you rarely see an independent advisor changing broker-dealers for a sign-on bonus, while that has traditionally been a primary catalyst for wirehouse and regional firm advisor movement.

Jon Henschen is President of Henschen & Associates, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics. He is frequently published and quoted in a variety of industry publications, including ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.

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