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  • Writer's pictureRichard DeSalvo

Here we go again?

Recruiting loans may signal a subprime problem

Recent news has shown that some of the nation’s largest independent wealth management firms are cutting big checks to attract big money. This is reminiscent of the big checks that broker dealers paid to attract advisors pre-2008 which may signal impending financial trouble.

According to a recent article in Investment News, there are two firms that have a combined total of outstanding recruiting loans nearing $800mm. For one firm, this is a 46% increase over last year and for the other, this is an increase of 9.6%. Conversely, the traditional wire houses are scaling back on the same risk they once took by 12%-18% from the prior year.[1]

What do these two firms know that others don’t and what if they’re wrong?

To minimize their risk and get a return on these assets, recruiting loans are usually conditional and will require personal guarantees, a minimum amount of AUM by a certain time, a minimum stay of employment, or some combination of these three. Additionally, loan payments can also be underwritten by lowering the effective payout on your GDC or charging higher platform fees to clients’ accounts.

Upon encountering one of these loans, we encourage you to understand what you’re signing and how it will affect your wallet and your clients’ fees. Do the research and look beyond the cash offer.

If you are unable to meet the stated requirements in your loan, you should know your legal commitments and associated ramifications. Typically, firms will not allow your DBA to take out a loan because a default on this loan will hit your personal assets. Said another way, make sure you can keep your promises after you take a check as your home may become collateralized.

Furthermore, it’s important that you know what default rates these firms assume in their underwriting process for the loans they issue. Many of these loans assume that a certain percentage of AUM will be moved by the advisor during transition. If that doesn’t happen and a chargeback is imposed by the firm, an advisor might not have the funds to pay it back.

That’s why I’m writing this blog and bringing this to your attention. If you decide to take a loan, be aware of the bigger picture and your firm’s ability to absorb defaults. We have all seen the ramifications of underestimating this metric and it can get out of hand quickly.

In fact, there are examples of this in recent events. Some wealth management firms hit by defaults now require that monies come into the firm first during transition. Once this requirement is met, a loan will follow. After-the-fact money is much less risky to any firm which explains why they would go about it this way.

With so much private equity and venture capital money hitting the wealth space, I anticipate upfront monies will be around for a bit and it will remain a seller's market. The big fear that concerns me is that this may be a house of cards.

This money has too many assumptions behind it for it to be paid back easily. Rather than making your next career choice on a quick, upfront check, base your decision on the quality of the firm and its ability to evolve into a key player in this space.

For the sake of the industry, I hope each loan is well satisfied and each firm, advisor, and client flourish. We’re all in trouble if they’re wrong.

Rich DeSalvo


F3 Logic, LLC

Where Fiduciary Freedom is First


Advisory services are offered through F3 Logic, LLC, a registered investment advisor. Securities offered through Independent Financial Group, LLC, a registered broker dealer. Member FINRA/SIPC. IFG is not affiliated with any of the entities listed. Additional advisory services may be offered by the respective entities listed as permissible by state law.

[1] April 9, 2019 - Advisor Hub: Recruiting Loans Swell at LPL and Ameriprise, Compress at Wirehouses


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