There has been a lot of talk lately in the news about retention awards given to financial advisors. With all of the public misperceptions on this issue, we thought we would throw in our two cents.

When a brokerage firm is purchased by another firm, it is customary (and many would argue necessary) to provide the financial advisors a retention award for staying at the new company. There are several reasons why this practice has been viewed as necessary in the industry.

It is important to realize that financial advisors are not the fat-cat executives that are receiving bonuses that are driving congress and some in the public crazy. Brokers do not receive fat salaries or fat year-end bonuses. Financial advisors get paid in direct proportion to the client assets they manage and the trades made. Most advisors in fact have most of their business in what is called fee-based business. This is where they receive a percentage of the assets they manage for their clients as their fee and not from buying and selling of stocks.

Good financial advisors are the gatekeeper of their client relationships. Most clients see themselves as a client of John Doe advisor at say Merrill Lynch, rather than as a client of Merrill Lynch which happens to have an advisor named John Doe that they use. If a broker has done a good job for you and you have a good relationship with him or her then it will likely not be a major issue with you if your advisor is at Merrill Lynch or Morgan Stanley Smith Barney.

Because of this, the buying firm sees providing their top revenue producing financial advisors some sort of a retention award to offset the negatives of the buyout as a prudent practice. The top performing advisors that get retention awards have well more than $50 million in assets they manage on the low side. Top producers will often have hundreds of millions in assets they manage. These assets weren’t just given to them. They worked hard for many years to build up their client base and a good advisor will have client loyalty from better than 8 out of 10 of their client base.

If a broker’s firm is being bought out, and his firm in fact will be becoming a new firm, then many advisors will go through the process of deciding if this new firm will be the right place for him or her and their clients. Just because the firm is retaining the old name doesn’t mean that it will stay the same old company with just a new owner. There will be new rules, new product platforms and perhaps new technology to adjust to. Many brokers will think if they are going to be at essentially a new firm anyway that they should check out the other competitor firms options available.

Other competitors of the firm being purchased become very aggressive in their recruiting during times of transition. Brokers are often offered two to three times the money that is typically offered as a retention award. If the buying firm didn’t offer any kind of retention award to offset even some of the recruiting packages top advisors are receiving, then attrition of their top producers (and the assets they manage) would sky rocket.

Another issue is that brokers realize that the firm buying their firm is paying big recruiting deals to bring in new advisors from other firms. To handsomely pay new brokers to come over and to not reward anything to the brokers that are showing loyalty by staying doesn’t sit well with many advisors.

To offer reasonable retention awards to top producers is a smart investment considering the loss of those advisors, and the assets (and revenues) they represent to the firm, could be devastating during a time when client assets are more important than ever.

-Darin Manis

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