Why It Matters When Advisors Switch Firms

What really motivates money managers.

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Financial advisors switch firms—it's a fact. I've moved in my career, and many advisors I know have moved as well. It's not uncommon, and in many cases it's for a good reason.

But sometimes it's not.

When moving is in everyone's best interest. Some advisors move to improve their own "work lifestyle." Some big money management firms are rife with complicated politics, rotating management teams, and at times, inflexible compliance oversight. Additionally, there are instances where firms have a laser focus on profit maximization and have to make harsh cost cutting efforts. For example, when profitability or earnings are down, firms naturally look to cut costs, and it usually starts with a reduction in administrative staff. As with any industry facing painful cutbacks, these sorts of changes can become oppressive in the daily life of some advisors who are working to serve the best interests of their clients.

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This is a bad situation, and probably one that will impact the client as well. It's simple—when everyone is busier, there is less time for the client. And, since each firm has its own culture and management style, it's possible that an advisor's competitor is able to offer a better lifestyle, more support, and fewer day-to-day hassles.

In an environment where the tug-of-war between clients' best interests and shareholder value has resulted in an advisor looking for—and finding—a more balanced alternative at another firm, a move may be the right choice for both advisor and client.

Another reason advisors move: money. An advisor who has a clean compliance record and manages a lot of client assets is a valuable commodity to a big firm. Because of this, companies offer lucrative transition packages to entice advisors to switch firms. Recent transition packages have offered compensation of up to 350 percent of the annual revenue an advisor produced for his or her current firm and a requirement to stay for at least nine years to avoid harsh repayment penalties.

That means an advisor who generated $1 million for his or her firm will receive $3.5 million over nine years (usually 100 percent to 150 percent of that is paid upfront when he or she switches firms) to move clients over to the new firm. Clearly, that is in the advisor's best interest, but is it in the clients' best interest? Not likely.

The reason: In order to fully realize the 350 percent, they have to increase the amount of revenue they generate and grow their asset base every year. The requirement to grow revenue and assets creates a huge conflict of interest between a trusted advisor and his or her client.

Consider these questions: How likely will the advisor be to inappropriately push clients into higher-margin products if a revenue goal needs to be met? How much time will the advisor spend with existing clients if they need to increase their assets under management every year? How likely is the advisor to move again if things go wrong with the new firm—if there are harsh penalties for leaving inside of nine years? A lot can change inside of a nine-year window. Ask any advisor at a large Wall Street firm to compare 2007 with 2010.

Get the real scoop. If your advisor is leaving to go to a new firm, ask some serious questions about why he or she is leaving. If your advisor says it's a better firm for the client, ask for five reasons why that's the case. Also, ask point-blank if he or she is getting paid a big upfront transition package.

These days, I don't think there is a huge difference between the big (remaining) firms, especially not after the recent "survival consolidation" that took place on Wall Street.

A lot of advisors are moving these days. Some are moving between the big firms and some are striking out on their own. If your advisor is moving and asks you to join, compare what's in it for you against what's in it for them. Make them take the time to prove why it's better for you … because it's very likely they've put the time in to ensure it's good for them.

David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria, VA, a full service financial planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 & 2010 based on asset under management) and has been interviewed by several national media sources for the past several years. David and Monument Wealth Management can be followed on their blog at Off The Wall, their Twitter account @MonumentWealth, and on their Facebook page. Member FINRA/SIPC.

*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results.

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