Recruiter Simon Hoyle publishes article "Think Twice About Broker-Dealers' Forgivable Loan Offers"

MINNEAPOLIS, Feb. 8, 2022 /PRNewswire-PRWeb/ -- Featured February 3, 2022 in Financial Advisor Magazine

Hoyle starts with showing how financial advisors have come to expect certain incentives from the firms trying to recruit them, and one of the biggest carrots is forgivable loans. But those loans, as common as they are, might become another casualty of the times. In fact, it might even be to advisors' advantage in the future to simply turn them down. He also shows how when regulators put admin fees in their cross-hairs, broker-dealers and RIAs will likely see their revenue curtailed—which could also blunt the size of the loans to transitioning advisors.

Hoyle also explains how other client advisory account types also make big fund contributions to broker-dealer incentive loans, in some cases more so than RAPM admin fees. Consider firm administration fees for advisory accounts, turnkey management programs, institutional custodians and third-party managers. The fees from these revenue centers have been golden for years, but many financial planners don't know whether their clients are subject to tacked-on fees from these programs. What values does a client receive from additional AUM fees charged expressly to access third-party managers?

In the relationship between loans and advisory revenue, Hoyle shows how forgivable loans are purposely constructed by issuers to collect back every dollar of the loan during it's schedule, and often well before. For firms to continue offering large notes, they must continue to earn large margins years into the rep relationship. But don't expect a clause in the loan agreement contract saying that existing fees can't be raised or that new ones can't be levied. Fee compression is real.

These problems shed light on the obvious conflicts of interest in forgivable notes, conflicts that become more acute when a recruit brings new advisory client assets over during their first year with a firm, triggering bonuses and calculation adjustments after the fact (adjustments known as "true-ups"). Hoyle notes how financial advisors are systemically encouraged to funnel advisory assets onto these platforms, which, again, will likely grab the wrong kind of attention. It could also be that advisors will be required to disclose to clients their forgivable loans and seek out firms with lower costs. Or they might take smaller notes or grants to cover only the actual hard-dollar costs of a move.

Hoyle shows how the alternatives allow broker-dealers and RIA's to provide a better long-term financial partnership with advisors, offering higher payouts and/or reduced fees in which the advisor nets more over time while acting in a fiduciary manner. If the relationship with the firms are stronger for all this, it's more likely the advisors will stay, an advantage the firms will appreciate. These better arrangements would also make it easier for advisors to move, and ease the cost of moving their clients (depending on the custodial relationships).

As the broker-dealers do battle, the big compensation packages are still being offered to woo advisors away. But it's these large transition packages that contribute to the debt mattress much of the industry is sleeping on.

Simon Hoyle is a Strategic Business Director at Henschen & Associates, a recruiting firm based on best match introductions to RIA/tuck-in/hybrid model partners focused on high retention. For more information you can reach Simon at [email protected]. Linked In

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Cristi Barkley, Henschen & Associates, 757-846-4107, [email protected]

SOURCE Henschen & Associates