Independent broker dealer recruiter Jon Henschen Publishes Guest Post On Michael Kitces’ Nerds Eye View, “Why Broker-Dealer Forgivable Notes Aren’t (Really) Forgiven"

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Jon Henschen is the November 23, 2020 featured guest blogger on Michael Kitces’ Nerds Eye View, where he takes a deep dive look into the emergence of broker-dealer “recruiting bonuses” in the form of forgivable notes.

A fiduciary-friendly movement amongst broker-dealers is bringing light to the less transparent costs that some BDs add to the equation, making it feasible for advisors considering a change in platform to effectively assess the true net cost of the platform for their business and their clients.

In his November 23, 2020, guest blog post on Michael Kitces’ Nerds Eye View, independent broker-dealer recruiter Jon Henschen discusses the history and mechanics of forgivable notes. He addresses ethical concerns they raise for advisors and their clients, and how the industry’s evolving landscape encourages broker-dealers to reconsider their incentive structures and advisors to consider whether forgivable note recruiting bonuses are worth their long-term consequences to clients.

Henschen opens his discussion by reviewing the early days of insurance broker-dealer recruiting efforts, when insurance broker-dealers would incentivize their brokers into the company’s proprietary products, paying higher commissions on them, setting percentage requirements for their proprietary products (e.g., 30% of all production must be in company product), and excluding competing products from the available product shelf.

These first-generation forgivable notes evolved away from proprietary products to general production. Today, they are typically structured as a percentage of a broker’s 12-month trailing gross dealer concession (GDC), and are considered by some advisors to be a required part of the job offer.

Henschen’s post then delves into the details, exploring standard forgivable note percentages and recruiting bonuses, required production levels during the note period and consequences should the advisor leave the firm prior to the end of the note period. He discusses how the use of the forgivable note continues to expand, and how industry leaders such as LPL base the forgivable note amount on profitability rather than production.

Henschen also looks at the primary profit centers of broker dealers today that serve to recover the cost of providing forgivable note recruiting bonuses, such as brokerage account transaction charges, revenue sharing from product vendors, markup on third-party money managers, proprietary advisory platforms and other profit centers.

The analysis then covers the emergence of “fiduciary-friendly” broker dealer firms that reject the “recruiting bonus/markup game” that enables the broker dealer to recover costs through these added layers that ultimately are passed on to the client. Henschen then details the types of incentives these fiduciary friendly firms offer and provides a direct comparison of upfront recruiting bonuses at traditional versus fiduciary-friendly broker dealers, with the bottom line cost to clients, which reveals a dramatic difference.

Closing, Henschen looks at how the recent implementation of no ticket charges on stocks and ETFs at Schwab and IWS (Fidelity Institutional) has introduced a new competitive dynamic to the broker-dealer marketplace, and shares a perspective from a fiduciary-friendly broker dealer.

Jon Henschen is founder 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 sources, including WealthManagement.com, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.

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