Acquisitions can be a quick way for a firm to double its assets under administration (AUA). But in order to ensure that AUA doesn’t walk out the door, dealers are offering financial advisors incentives with some hefty strings attached, says Brian Curry, president of Burlington, Ont.-based Curry-Henry Group Inc., which specializes in advisor placement and recruiting.
Historically, these incentives, known as “retention bonuses,” were paid out in the form of cash – usually as a five-year, forgivable loan. Today, with many of the big competitors being bank-owned firms, the offer of cash and stock is becoming the norm to lock in an advisor’s commitment. Stock options come with a vesting period of three to five years, Curry notes, and forgivable loans of seven to 10 years are being extended.
“We have most definitely seen a change in this [strategy] over the past 10 years,” Curry says. “We used to see cash on the table of around $200,000. But now, we hear of offers of $500,000 or more. However, some contracts have almost doubled in length of commitment.”
During an acquisition, the retention of AUA on the buying firm’s part is critically important. If an advisor walks out the door because he or she doesn’t like the terms of the deal, the results will be costly to the acquiring firm, which has paid for that advisor’s AUA. And the firm would have to find a way to replace it.
Andrew Marsh, president and CEO of Toronto-based Richardson GMP Ltd., knows better than anyone about the pressure of retaining AUA. His independent brokerage firm has just completed its acquisition of Toronto-based Macquarie Private Wealth Inc. Richardson GMP had to pay out several retention bonuses to persuade top talent – and their AUA – to stay on its books.
In fact, following the announcement of the acquisition, competitors quickly swooped in to offer lofty recruitment bonuses to former Macquarie advisors – upward of $2 million in some cases.
Even more pressure for Marsh: the $132-million deal did not include price protection – meaning that if Richardson GMP didn’t retain a single Macquarie advisor, it still had to pay the full price tag.
Retaining advisors following an acquisition is far from being a slam dunk, as Montreal-based National Bank Financial Ltd. (NBF) found out after it agreed to pay $206 million in cash to acquire the advisory business of HSBC Securities (Canada) Inc. in 2011. NBF even set aside an additional amount to ensure the maximum retention of advisors, but was unable to keep the full roster of HSBC advisors.
That deal did include price protection, and the final price was later adjusted to $108 million in cash to reflect the lower advisor retention levels.
In order for Richardson GMP to ensure maximum advisor retention levels would be met, Marsh met with Macquarie advisors prior to putting a retention bonus on the table. Although the process may have taken a bit longer than he anticipated, Marsh offered the majority of Macquarie advisors a retention package that includes a combination of a cash bonus (paid out as a seven-year, forgivable loan) and stock incentives.
Although Richardson GMP won’t disclose the final amount spent on the retention bonuses, Marsh says, the offers were calculated on an individual basis on the advisor’s revenue, total book size, length of time with predecessor firms and if Macquarie had recently recruited the advisor.
“Our main goal, when it came to the Macquarie advisors, was to offer them shares in [Richardson GMP],” Marsh says. “We wanted them to be as equal and balanced as anyone else in the firm.”
Next: Not every Macquarie advisor was offered a deal
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Not every Macquarie advisor was offered a deal
To date, Richardson GMP has retained 90% of the Macquarie advisors it “intended to retain.” This means that not every Macquarie advisor was offered a deal. In fact, Richardson GMP made offers to only two-thirds of Macquarie advisors.
Dundee Goodman Private Wealth, a division of Dundee Securities Ltd. of Toronto, has agreed to purchase the remaining 60 Macquarie advisors.
As well, existing Richardson GMP advisors were not offered retention bonuses, Marsh says: “The idea that someone is going to get paid in a situation in which there is no disruption or no risk to their business is flawed.”
Another firm, Mississauga, Ont.-based Investment Planning Counsel Inc. (IPC), which has more than 1,000 advisors on its roster, recently completed its 25th acquisition at the end of 2013. Chris Reynolds, president of IPC, says the issue of retention bonuses has to be dealt with carefully.
Reynolds doesn’t offer retention bonuses with every acquisition. He bases his decision largely on how much an acquired advisor’s business will be disrupted, as well on how much his or her existing compensation structure is going to change.
“Do you pay everyone in every deal [a retention bonus]?” Reynolds asks. “Retention bonuses can be a slippery slope if not dealt with in the correct manner. It’s not like our firm’s margins are so thick that we can just pay people money to hang around.”
In IPC’s recent acquisition of Ottawa-based Independent Planning Group Inc. (IPG), the retention bonuses varied depending on each advisor’s compensation structure.
Some IPG advisors were at a higher commission rate than the current IPC platform offers, while others were working on a flat-fee model, which IPC does not offer.
In IPC’s 2010 purchase of Regina-based Partners in Planning Financial Group Ltd. (PIP), that firm’s business model was similar to that of IPC. Thus, IPC did not pay out any retention bonuses to PIP advisors. Instead, they were offered enhanced support services.
Similar to Richardson GMP’s policy, Reynolds points out that IPC is careful not to offer existing IPC advisors considering leaving the firm a retention bonus to stay on: “If advisors believe they can get better value for their money someplace else, then that’s what they should do. But to pay them a bonus to stay just doesn’t make sense.”
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