Photo: Warner Bros
One of the dirty little secrets about your broker leaving one firm for another is: The Promissory Note.See, Wall Street is a lot like the mafia. You join the family and you expect certain things, certain protections. Certain comforts. Certain access. And as a client maybe you expect the same thing. And then one day, when your broker calls about how he or she is joining a new ‘family’, you expect that certain promises will be kept. But with those promises there are certain expectations about the loyalty you & your advisor will have to said family.
So, I’m here to tell you– forget all of the empty promises your broker is probably making about the new family; about how the firm they just joined is “SO much better.” Because, frankly they’re probably not.
At the end of the day, the legacy firms of Wall Street provide a service– just like the mafia, strength in numbers, but it comes with a cost. I should know, I was part of one of the larger wealth management teams for one of the major firms in the Los Angeles region. Before we ultimately broke up as a team, we shopped our practice to almost every other major firm on the Street.
SmithBarney sold us on the strength of Citibank (See: Citi survives after largest bailout yet). Wachovia sold us on the strength of their bank too (See: Wachovia Rescue Relied on Usurpation of Tax Law) .
Morgan Stanley? They sold advisors on the access to IPOs (See: IPO Scandal of 2000). With John Mack back as CEO in 2005, the bank finally had it’s swagger again. “Mack the Knife” was in the house– And I’ll never forget what he said in 2007, “I think this firm has the capacity to take a lot more risk than it has in the past.” Eventually Morgan Stanley became the largest recipient of the secret loans from the Fed, according to Bloomberg.
Now, if these firms don’t really offer any sort of real information advantage, or protection because of the size of their family, or meaningful access for 99% of us, then it must be the technology. It’s got to be world-class. Lab coat stuff, right? No. Not for retail. What you see today is a cobbled hodge-podge of external software that almost anyone could buy off the internet. Or worse, the firm’s software is internally developed as a function of a bureaucratic monolithic technology committee. The most laughable part of the “rule by committee” approach is that it’s almost always compromised of people who ultimately are not the end user of the tools they make. They make nice comfortable salaries, meaning speed & accountability or truly fixing the problem aren’t really top of mind for any of them. The mantra of our IT department was, “never engineer yourself out of a job.” So, think Microsoft; then make it 20 times worse.
But the company’s internal resources for your advisor, they must be robust & plentiful. Nope. The firm wants to keep the salesforce hungry. It gives their reps the edge to keep fighting for more. And starvation gives the firm the edge, to keep their salesforce desperate for more. It’s a balancing act between the two.
On Wall Street, think: Survivor Island. In the mafia, each of the henchmen are given certain territories to avoid conflict with each other; it’s actually somewhat civilized. On Wall Street, it’s take or be taken. If I met someone who had a broker with my firm, I’d say nothing bad about the broker, but I’d be ready to pounce on any whiff of weakness with regard to the other broker in my “family.” That’s what we all did. That’s the way it works. The corner offices get bigger, and the rest fend for themselves. If you get in the fight within the family, the bigger producer wins. Always. So ‘get big quick’, or become best friends with your manager. That’s the key to success on Survivor Island: Wall Street.
And, it was (and is) insanity.
We’ve all been sold on the hope & promise of a better tomorrow, clients and advisors alike. Sold American, on the promise that somehow being associated with la cosa nostra is the answer.
Yet, in the end, all of these promises really don’t meaningfully change the life of a client, at least for the better. For the advisor, it’s usually a sideways move in the long run — they’ll never be a truly made-guy; they’ll never be a managing director or CEO. Advisors are the foot soldiers, plain & simple.
The firm does promise “One More Thing” though; a huge paycheck to your advisor for moving clients to the new firm. The payday, as you’d expect by now, isn’t free money. It’s more like the vig. Here’s how it works.
The advisor gets a $1,000,000 check to move firms. The size of the check is usually some multiple of the fees & commissions they’ve generated on your accounts in the last three years or trailing 12 months. For that amount of money, it’s probably a 10 year deal. So, that’s 10 years your broker promises to stay at the new firm, no matter how much it ultimately sucks for them, or, you, the client. No matter what the cost — in fees, or scandal.
There’s also the expectation that some percentage of their clients will move with them and that they will generate X amount of revenue & there will be new assets over the following years.
That first year, your broker gets a huge check & pays taxes on 1/10th of the lump sum. And every year thereafter another 1/nth of the taxes are still due.
While all of this money is being taxed & paid for incrementally by your broker, the firm is also collecting interest on the outstanding money of the loan, usually at a rate of around 4.5% – 7%. Accruing from day one. They’re lending your broker money to remain an indentured slave. A foot soldier for the family– an earner.
Remember– no matter what, the house always makes money. And if you do the maths, really all the advisor has done is accelerate the cashflow they’d otherwise receive from the commissions & fees they’ll eventually charge you. The firm is literally lending your advisor the money on the future fees your money will generate for the firm. And the firm expects your advisor make good; To deliver the money & revenue, to keep their promise.
And if your broker realises they made a mistake, or doesn’t bring enough clients to reach the benchmarks, or do enough of the type of business the firm wants them to do… the firm only has one promise left, Goodfellas-style…”Business bad? Fuck you, pay me. Oh, you had a fire? Fuck you, pay me. Place got hit by lightning huh? Fuck you, pay me.“
Sadly, I’ve seen too many brokers get caught in the squeeze. They’re not quite making enough money to pay the bills or maybe they get a branch manager they hate (or hates them), or maybe the advisor just gets tired of hearing the same excuses from the firm — so they make the jump & take the check. Then the market takes a dive, clients get nervous & stop buying, or worse the clients stay at the old firm “just until things blow over.”
And then the broker realises it. They’re screwed.
All they’ve done is accelerate & exacerbate their cash-flow situation. All they’ve done is invite Paul “Paulie” Cicero into their business as their partner. And their new bedfellows? The IRS & the Firm: They want their money — and now it’s with interest due.
Industry leading securities attorney, Patrick Burns, has a great piece up on Registered Rep warning about the one thing an advisor never wants to do about a promissory note; ignore it.
If you want to see how much of a train wreck the business of switching firms can be for your broker, you really must read Pat’s post.
I wish the promissory practice was permanently barred from the industry, because it makes good people do bad things. It makes advisors (and Wall Street firms) act like they’re running the Bamboo Lounge (watch till the end of the video, you’ll get the reference).
And remember, never turn your back on the mob.
Read More: Don’t Ignore That Promissory Note
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